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FIN 370 Week 4 Practice: Risk and the Cost of Capital Quiz

FIN 370 Week 4 Practice: Risk and the Cost of Capital Quiz
 

Complete the Week 4 “Practice: Risk and the Cost of Capital Quiz” in Connect®.

Note: You have unlimited attempts available to complete practice assignments. The highest scored attempt will be recorded.

These assignments have earlier due dates, so plan accordingly.

Grades must be transferred manually to eCampus by your instructor. Don’t worry, this might happen after your due date.

 

Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 14 percent and standard deviation of 30 percent. The average return and standard deviation of WholeMart are 12 percent and 25 percent; and of Fruit Fly are 25 percent and 40 percent.

Multiple Choice

 

 

 

 
 

 

 

Night Ryder, WholeMart, Fruit Fly

 

 

 

 
 

 

 

WholeMart, Night Ryder, Fruit Fly

 

 

 

 
 

 

 

WholeMart, Fruit Fly, Night Ryder

 

 

 

 
 

 

 

Fruit Fly, Night Ryder, WholeMart

 

 

Which of these is the dollar return characterized as a percentage of money invested?

Multiple Choice

 

 

 

 
 

 

 

Dollar return

 

 

 

 
 

 

 

Percentage return

 

 

 

 
 

 

 

Market return

 

 

 

 
 

 

 

Average return

 

 

Rx Corp. stock was $60.00 per share at the end of last year. Since then, it paid a $1.00 per share dividend last year. The stock price is currently $62.50. If you owned 400 shares of Rx, what was your percent return?

Multiple Choice

 

 

 

 
 

 

 

4.17 percent

 

 

 

 
 

 

 

5.83 percent

 

 

 

 
 

 

 

5.60 percent

 

 

 

 
 

 

 

1.67 percent

 

 

Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?

Multiple Choice

 

 

 

 
 

 

 

Portfolio

 

 

 

 
 

 

 

Average return

 

 

 

 
 

 

 

Dollar return

 

 

 

 
 

 

 

Market return

 

Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?

Multiple Choice

 

 

 

 
 

 

 

Standard deviation

 

 

 

 
 

 

 

Total risk

 

 

 

 
 

 

 

Diversifiable risk

 

 

 

 
 

 

 

Market risk

 

 

Which of these is a measure summarizing the overall past performance of an investment?

Multiple Choice

 

 

 

 
 

 

 

Dollar return

 

 

 

 
 

 

 

Average return

 

 

 

 
 

 

 

Percentage return

 

 

 

 
 

 

 

Market return

 

 

Which of these statements is true?

Multiple Choice

 

 

 

 
 

 

 

When people purchase a stock, they know exactly what their dollar and percent return are going to be.

 

 

 

 
 

 

 

When people purchase a stock, they do not know what their return is going to be-either short term or in the long run.

 

 

 

 
 

 

 

Many people purchase stocks as they find comfort in the certainty for this safe form of investing.

 

 

 

 
 

 

 

When people purchase a stock, they know the short-term return, but not the long-term return.

 

 

TechNo stock was $25 per share at the end of last year. Since then, it paid a $1.50 per share dividend last year. The stock price is currently $23. If you owned 300 shares of TechNo, what was your percent return?

Multiple Choice

 

 

 

 
 

 

 

−2 percent

 

 

 

 
 

 

 

6 percent

 

 

 

 
 

 

 

−8 percent

 

 

 

 
 

 

 

6.5 percent

 

 

Which statement is true?

Multiple Choice

 

 

 

 
 

 

 

The larger the standard deviation, the lower the total risk.

 

 

 

 
 

 

 

The larger the standard deviation, the more portfolio risk.

 

 

 

 
 

 

 

The standard deviation is not an indication of total risk.

 

 

 

 
 

 

 

The larger the standard deviation, the higher the total risk.

 

MedTech Corp. stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?

Multiple Choice

 

 

 

 
 

 

 

22.67 percent

 

 

 

 
 

 

 

7.20 percent

 

 

 

 
 

 

 

8.83 percent

 

 

 

 
 

 

 

23.55 percent

 

 

Sprint Nextel Corp. stock ended the previous year at $25.00 per share. It paid a $2.57 per share dividend last year. It ended last year at $18.89. If you owned 650 shares of Sprint, what was your dollar return and percent return?

Multiple Choice

 

 

 

 
 

 

 

$2,960; 11.13 percent

 

 

 

 
 

 

 

−$3,960; −15.13 percent

 

 

 

 
 

 

 

−$2,301; −14.16 percent

 

 

 

 
 

 

 

−$4,960; −16.13 percent

 

 

 

FedEx Corp. stock ended the previous year at $113.39 per share. It paid a $0.40 per share dividend last year. It ended last year at $126.69. If you owned 300 shares of FedEx, what was your dollar return and percent return?

Multiple Choice

 

 

 

 
 

 

 

$2,009; 9.13 percent

 

 

 

 
 

 

 

$4,250; 12.29 percent

 

 

 

 
 

 

 

$4,110; 12.08 percent

 

 

 

 
 

 

 

$3,990; 11.73 percent

 

 

Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 15 percent. The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of Poker-R-Us are 12 percent and 35 percent.

Multiple Choice

 

 

 

 
 

 

 

Idol Staff, Poker-R-Us, Rail Haul

 

 

 

 
 

 

 

Poker-R-Us, Idol Staff, Rail Haul

 

 

 

 
 

 

 

Rail Haul, Idol Staff, Poker-R-Us

 

 

 

 
 

 

 

Idol Staff, Rail Haul, Poker-R-Us

 

 

A stock has an expected return of 15 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 11 percent. Given this data, which of the following statements is correct?

Multiple Choice

 

 

 

 
 

 

 

Both investments have the same diversifiable risk.

 

 

 

 
 

 

 

The stock investment has a better risk-return trade-off.

 

 

 

 
 

 

 

The bond investment has a better risk-return trade-off.

 

 

 

 
 

 

 

The two assets have the same coefficient of variation.

 

 

A stock has an expected return of 12 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 15 percent. Given this data, which of the following statements is correct?

Multiple Choice

 

 

 

 
 

 

 

The two assets have the same coefficient of variation.

 

 

 

 
 

 

 

Both investments have the same diversifiable risk.

 

 

 

 
 

 

 

The stock investment has a better risk-return trade-off.

 

 

 

 
 

 

 

The bond investment has a better risk-return trade-off.

 

 

Year to date, Company Y had earned a 7 percent return. During the same time period, Company R earned 9.25 percent and Company C earned −2.25 percent. If you have a portfolio made up of 35 percent Y, 40 percent R, and 25 percent C, what is your portfolio return?

Multiple Choice

 

 

 

 
 

 

 

5.5875 percent

 

 

 

 
 

 

 

4.6667 percent

 

 

 

 
 

 

 

6.1667 percent

 

 

 

 
 

 

 

12.6625 percent

 

 

Which of these is the investor’s combination of securities that achieves the highest expected return for a given risk level?

Multiple Choice

 

 

 

 
 

 

 

Total portfolio

 

 

 

 
 

 

 

Modern portfolio

 

 

 

 
 

 

 

Optimal portfolio

 

 

 

 
 

 

 

Efficient portfolio

 

If you invested $30,000 in Disney and $10,000 in Oracle and the two companies returned 6 percent and 12 percent respectively, what was your portfolio’s return?

Multiple Choice

 

 

 

 
 

 

 

9.0 percent

 

 

 

 
 

 

 

7.5 percent

 

 

 

 
 

 

 

18.0 percent

 

 

 

 
 

 

 

10.5 percent

 

 

The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?

Multiple Choice

 

 

 

 
 

 

 

6.2 percent

 

 

 

 
 

 

 

18.1 percent

 

 

 

 
 

 

 

11.9 percent

 

 

 

 
 

 

 

24.3 percent

 

 

 

Which of the following is a true statement?

Multiple Choice

 

 

 

 
 

 

 

The risk and return that a firm experienced in the past is also the risk level for its future.

 

 

 

 
 

 

 

Firms can quite possibly change their stocks’ risk level by substantially changing their business.

 

 

 

 
 

 

 

If a firm takes on less risky new projects over time, the firm itself will become more risky.

 

 

 

 
 

 

 

If a firm takes on riskier new projects over time, the firm itself will become less risky.

 

 

Compute the expected return given these three economic states, their likelihoods, and the potential returns:

Economic State      Probability          Return

Fast Growth    0.3        40    %

Slow Growth  0.4        15    %

Recession       0.3        −15  %

________________________________________

 

Multiple Choice

 

 

 

 
 

 

 

40.0 percent

 

 

 

 
 

 

 

18.3 percent

 

 

 

 
 

 

 

22.5 percent

 

 

 

 
 

 

 

13.5 percent

 

 

Compute the expected return given these three economic states, their likelihoods, and the potential returns:

Economic State      Probability          Return

Fast Growth    0.1        50    %

Slow Growth  0.6        8     %

Recession       0.3        −10  %

________________________________________

 

Multiple Choice

 

 

 

 
 

 

 

12.8 percent

 

 

 

 
 

 

 

6.8 percent

 

 

 

 
 

 

 

16.0 percent

 

 

 

 
 

 

 

22.7 percent

 

 

Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?

Multiple Choice

 

 

 

 
 

 

 

Expected return

 

 

 

 
 

 

 

Required return

 

 

 

 
 

 

 

Efficient return

 

 

 

 
 

 

 

Market return

 

 

Which of these is the set of probabilities for all possible occurrences?

Multiple Choice

 

 

 

 
 

 

 

Stock market bubble

 

 

 

 
 

 

 

Probability

 

 

 

 
 

 

 

Market probabilities

 

 

 

 
 

 

 

Probability distribution

 

 

Which of the following is a model that includes an equation that relates a stock’s required return to an appropriate risk premium?

Multiple Choice

 

 

 

 
 

 

 

Asset pricing

 

 

 

 
 

 

 

Behavioral finance

 

 

 

 
 

 

 

Efficient markets

 

 

 

 
 

 

 

Beta

 

 

Compute the expected return given these three economic states, their likelihoods, and the potential returns:

 

Economic State      Probability          Return

Fast Growth    0.40      25    %

Slow Growth  0.55      12    %

Recession       0.05      −50  %

________________________________________

Multiple Choice

 

 

 

 
 

 

 

14.1 percent

 

 

 

 
 

 

 

19.1 percent

 

 

 

 
 

 

 

29.0 percent

 

 

 

 
 

 

 

−4.3 percent

 

 

The average annual return on the S&P 500 Index from 1986 to 1995 was 17.6 percent. The average annual T-bill yield during the same period was 9.8 percent. What was the market risk premium during these 10 years?

Multiple Choice

 

 

 

 
 

 

 

8.8 percent

 

 

 

 
 

 

 

7.8 percent

 

 

 

 
 

 

 

8.2 percent

 

 

 

 
 

 

 

9.8 percent

 

 

If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market?

Multiple Choice

 

 

 

 
 

 

 

6 percent

 

 

 

 
 

 

 

8 percent

 

 

 

 
 

 

 

2 percent

 

 

 

 
 

 

 

10 percent

 

 

You have a portfolio consisting of 20 percent Boeing (beta = 1.3) and 40 percent Hewlett-Packard (beta = 1.6) and 40 percent McDonald’s stock (beta = 0.7). How much market risk does the portfolio have?

Multiple Choice

 

 

 

 
 

 

 

This portfolio has 28 percent more risk than the general market.

 

 

 

 
 

 

 

This portfolio has 18 percent more risk than the general market.

 

 

 

 
 

 

 

This portfolio has 28 percent less risk than the general market.

 

 

 

 
 

 

 

This portfolio has 18 percent less risk than the general market.

 

 

Which of these refers to something that has not been released to the public, but is known by few individuals, likely company insiders?

Multiple Choice

 

 

 

 
 

 

 

Insider trading

 

 

 

 
 

 

 

Privately held information

 

 

 

 
 

 

 

Restricted stock

 

 

 

 
 

 

 

Audited financial statements

 

 

Which of the following is the asset pricing theory based on a beta, a measure of market risk?

Multiple Choice

 

 

 

 
 

 

 

Efficient market hypothesis

 

 

 

 
 

 

 

Behavioral asset pricing model

 

 

 

 
 

 

 

Capital asset pricing model

 

 

 

 
 

 

 

Efficient markets asset pricing model

 

 

Netflix, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflix’s risk premium?

Multiple Choice

 

 

 

 
 

 

 

29.38 percent

 

 

 

 
 

 

 

25.72 percent

 

 

 

 
 

 

 

22.38 percent

 

 

 

 
 

 

 

20.91 percent

 

 

Which of the following are the stocks of small companies that are priced below $1 per share?

Multiple Choice

 

 

 

 
 

 

 

Stock market bubble stocks

 

 

 

 
 

 

 

Bargain stocks

 

 

 

 
 

 

 

Penny stocks

 

 

 

 
 

 

 

Hedge fund stocks

 

 

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company’s risk premium?

Multiple Choice

 

 

 

 
 

 

 

11.64 percent

 

 

 

 
 

 

 

34.92 percent

 

 

 

 
 

 

 

12.00 percent

 

 

 

 
 

 

 

22.91 percent

 

 

Shares of stock issued to employees that have limitations on when they can be sold are known as:

Multiple Choice

 

 

 

 
 

 

 

restricted stock.

 

 

 

 
 

 

 

privately held information.

 

 

 

 
 

 

 

stock market bubble.

 

 

 

 
 

 

 

executive stock options.

 

 

ABC Inc. has a dividend yield equal to 3 percent and is expected to grow at a 7 percent rate for the next seven years. What is ABC’s required return?

Multiple Choice

 

 

 

 
 

 

 

11 percent

 

 

 

 
 

 

 

10 percent

 

 

 

 
 

 

 

4 percent

 

 

 

 
 

 

 

5 percent

 

 

Which of the following is a true statement?

Multiple Choice

 

 

 

 
 

 

 

To estimate the before-tax cost of debt, we need to solve for the Yield to Maturity (YTM) on the firm’s existing debt.

 

 

 

 
 

 

 

To estimate the before-tax cost of debt, we use the average rate on the firm’s existing debt.

 

 

 

 
 

 

 

To estimate the before-tax cost of debt, we use the coupon rate on the firm’s existing debt.

 

 

 

 
 

 

 

To estimate the before-tax cost of debt, we need to solve for the Yield to Call (YTC) on the firm’s existing debt.

 

 

Which of the following will impact the cost of equity component in the weighted average cost of capital?

Multiple Choice

 

 

 

 
 

 

 

The risk-free rate

 

 

 

 
 

 

 

Expected return on the market

 

 

 

 
 

 

 

Beta

 

 

 

 
 

 

 

All of the above

 

 

Which of the following statements is correct?

Multiple Choice

 

 

 

 
 

 

 

All of the statements are correct.

 

 

 

 
 

 

 

The weights of debt and equity should be based on the balance sheet because this is the most accurate assessment of the valuation.

 

 

 

 
 

 

 

The weighted average cost of capital is calculated on a before-tax basis.

 

 

 

 
 

 

 

An increase in the market risk premium is likely to increase the weighted average cost of capital.

 

 

Which of the following will directly impact the cost of equity?

Multiple Choice

 

 

 

 
 

 

 

Profit margins

 

 

 

 
 

 

 

Stock price

 

 

 

 
 

 

 

Expected growth rate in sales

 

 

 

 
 

 

 

Expected future tax rates

 

 

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm’s cash flows as:

Multiple Choice

 

 

 

 
 

 

 

a weighted average of the capital components costs.

 

 

 

 
 

 

 

they apply to each asset as they are purchased with their respective forms of debt or equity.

 

 

 

 
 

 

 

a sum of the capital components costs.

 

 

 

 
 

 

 

a simple average of the capital components costs.

 

 

ADK has 30,000 15-year 9 percent annual coupon bonds outstanding. If the bonds currently sell for 111 percent of par and the firm pays an average tax rate of 36 percent, what will be the before-tax and after-tax component cost of debt?

Multiple Choice

 

 

 

 
 

 

 

9 percent; 5.76 percent

 

 

 

 
 

 

 

7.91 percent; 5.06 percent

 

 

 

 
 

 

 

8.05 percent; 5.15 percent

 

 

 

 
 

 

 

7.74 percent; 4.95 percent

 

 

Uptown Inc. has preferred stock selling for 102 percent of par that pays a 6 percent annual coupon. What would be Uptown’s component cost of preferred stock?

Multiple Choice

 

 

 

 
 

 

 

5.88 percent

 

 

 

 
 

 

 

1.02 percent

 

 

 

 
 

 

 

6.12 percent

 

 

 

 
 

 

 

6.00 percent

 

 

OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $21 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 111 percent of par ($1,000), what weight should you use for debt in the computation of OMG’s WACC?

Multiple Choice

 

 

 

 
 

 

 

25.79 percent

 

 

 

 
 

 

 

21.86 percent

 

 

 

 
 

 

 

29.86 percent

 

 

 

 
 

 

 

32.74 percent

 

 

JackITs has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $28 per share, the preferred shares are selling for $13.50 per share, and the bonds are selling for 98 percent of par, what would be the weight used for equity in the computation of JackITs’ WACC?

Multiple Choice

 

 

 

 
 

 

 

83.08 percent

 

 

 

 
 

 

 

91.19 percent

 

 

 

 
 

 

 

33.33 percent

 

 

 

 
 

 

 

80.88 percent

 

 

An average of which of the following will give a fairly accurate estimate of what a project’s beta will be?

Multiple Choice

 

 

 

 
 

 

 

Pure-play proxies

 

 

 

 
 

 

 

Flotation beta

 

 

 

 
 

 

 

Proxy beta

 

 

 

 
 

 

 

Weighted average beta

 

 

Marme Inc. has preferred stock selling for 137 percent of par that pays an 11 percent annual dividend. What would be Marme’s component cost of preferred stock?

Multiple Choice

 

 

 

 
 

 

 

8.03 percent

 

 

 

 
 

 

 

11.00 percent

 

 

 

 
 

 

 

8.17 percent

 

 

 

 
 

 

 

10.16 percent

 

 

FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119 percent of par ($1,000), what weight should you use for debt in the computation of FarCry’s WACC?

Multiple Choice

 

 

 

 
 

 

 

4.93 percent

 

 

 

 
 

 

 

5.81 percent

 

 

 

 
 

 

 

5.07 percent

 

 

 

 
 

 

 

6.30 percent

 

 

Which of these are fees paid by firms to investment bankers for issuing new securities?

Multiple Choice

 

 

 

 
 

 

 

Interest expense

 

 

 

 
 

 

 

User fees

 

 

 

 
 

 

 

Flotation costs

 

 

 

 
 

 

 

Seller financing charges

 

 

Which of the following is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing?

Multiple Choice

 

 

 

 
 

 

 

Generally accepted accounting principle

 

 

 

 
 

 

 

Financing principle

 

 

 

 
 

 

 

WACC principle

 

 

 

 
 

 

 

Separation principle

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