Financial Management,Theory & Practice Final Exam | Complete Solution

QUESTION 1

 

The risk-free rate is 6.4%, the market risk premium is 7.5%, and the stock’s beta is 1.52.  What is the cost of common stock?

 

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

1 points  

QUESTION 2

 

A bond that sells for less than face value is called as:

                               

premium bond

                               

debenture

                               

perpetuity

                               

par value bond

                               

discount bond

1 points 

 

QUESTION 3

 

ABC Company's last dividend was $2.3.  The dividend growth rate is expected to be constant at 6% for 3 years, after which dividends are expected to grow at a rate of 4% forever.  The firm's required return (rs) is 13%.  What is its current stock price (i.e. solve for Po)?

 

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 4

 

The ABC Co. has $1,000 face value stock outstanding with a market price of $1,150.1. The stock pays interest annually, matures in 14 years, and has a yield to maturity of 9.3 percent. What is the annual coupon amount?

 

Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 5

 

You have a portfolio of two risky stocks which turns out to have no diversification benefit. The reason you have no diversification is the returns:

 

                               

are too large to offset.

 

                               

are too small.

                               

are completely unrelated to one another.

 

                               

move perfectly opposite of one another.

 

                               

move perfectly with one another.

 

1 points  

QUESTION 6

 

If the market value of debt is $77,438, market value of preferred stock is $66,948, and market value of common equity is 31,545, what is the weight of preferred stock?

 

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 7

 

The ABC Company has a cost of equity of 14.5 percent, a pre-tax cost of debt of 3 percent, and a tax rate of 34 percent. What is the firm’s weighted average cost of capital if the weight of debt is 48 percent?

 

Note: Enter your answer in precentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 8

 

The beta of the risk-free asset is:

                               

0

 

                               

1

 

                               

1.5

 

                               

2

 

1 points  

QUESTION 9

 

Below is the stock split data for ABC Company:

 

 

                Stock

splits

31-Dec-90           

31-Dec-91            2 for 1

31-Dec-92           

31-Dec-93            6 for 3

31-Dec-94           

31-Dec-95           

31-Dec-96            1.5 for 1

31-Dec-97           

31-Dec-98            2 for 1

31-Dec-99           

If you bought 6,288 shares in the beginning of 1990 and during the period of 10 years never bought or sold additional shares, how many shares would you have by the end of 1999?

 

Enter your answer rounded off to two decimal points.

 

 

 

1 points  

QUESTION 10

 

Suppose the nominal rate is 14.9% and the inflation rate is 6.4%. Solve for the real rate.

 

Use the Fisher Equation to get your anser.

 

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 11

 

You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. One stock has a beta of 1.88. What does the beta of the second stock have to be if you want the portfolio to have a beta of 1.08?

 

Enter your answer rounded off to two decimal points.

 

 

1 points  

QUESTION 12

 

The principal amount of a bond that is repaid at the end of term is called the par value or the:

 

                               

coupon value

                               

back-end value

                               

perpetuity value

                               

face value

                               

call premium

1 points  

QUESTION 13

 

A stock just paid a dividend of D0 = $1.9.  The required rate of return is rs = 20.5%, and the constant growth rate is g = 3%.  What is the current stock price?

 

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 14

 

You want to create a portfolio as risky as the market. Suppose you invest your money in Stocks A, B, C, and the risk-free asset. What is the weight of Stock C in your portfolio?

 

Stock     Weights(%)     Beta

 

A               15                1.4

 

B               14                0.4

 

C               ?                  1.1

 

Rf              ?                   ?

 

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 15

 

Suppose that today's stock price is $54.8. If the required rate on equity is 15.8% and the growth rate is 6.9%, compute the expected dividend (i.e. compute D1)

 

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 16

 

Suppose the exchange rate is $1.556 per euro. If the euro appreciates by 25% against the dollar, how many euros would a dollar buy tomorrow?

 

Enter your answer rounded off to FOUR decimal points. Do not enter any currency unit in the answer box.

 

 

1 points  

QUESTION 17

 

ABC’s last dividend paid was $4.21, its required return is 21%, its growth rate is 7%. What is ABC's expected stock price in 17 years?

 

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 18

 

The common stock of ABC Industries is valued at $73.8 a share. The company increases their dividend by 7.6 percent annually and expects their next dividend to be $2.06. What is the required rate of return on this stock?

 

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 19

 

ABC company’s market value of common stock is $200 million, preferred stock is $300 million, and debt is $500 million. Suppose that the cost of equity is 7%, the before-tax cost of debt is 4.9%, cost of preferred stock is 4.2%, and the tax rate is 32%.

 

Compute the WACC.

 

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 20

 

The spot rate for the pound is £0.6406 = $1 and the spot rate for the Canadian dollar is C$1.2888 = $1. What is the £/C$ cross rate?

 

Enter your answer rounded off to FOUR decimal points. Do not enter any currency sign in the answer box.

 

 

1 points  

QUESTION 21

 

Based on the following data, calculate the returns for June 2014

 

 

Year

Month

Div

Price

2012

May

$0.50

$14.35

2012

June

$0.60

$20

2012

July

$0.70

$22.12

 

 

 

Enter your answer in percentages rounded off to two decimal points.

 

 

1 points  

QUESTION 22

 

You have observed the following returns on ABC's stocks over the last six years:

 

4.6%, 9.1%, 19%, -12.4%, 15.3%, -15.2%

 

What is the geometric average returns on the stock over this six-year period.

 

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

1 points  

QUESTION 23

 

Standard deviation measures:

                               

diversifiable risk

 

                               

total risk

 

                               

economic risk

 

                               

unsystematic risk

 

                               

systematic risk

 

1 points  

QUESTION 24

 

One year ago, you puchased 87 shares of ABC stock for $29.2 per share. During the year, you received a dividend of $3.3 per share. Today, you sold all your shares for $22.3. What are the percentage return on your investment?

 

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

 

 

1 points  

QUESTION 25

 

If the coupon rate is greater than the yield to maturity, the bond will:

 

                               

sell at par

                               

sell at a premium

                               

sell at a discount

1 points  

QUESTION 26

 

ABC, Inc. has 4 percent bonds outstanding that mature in 25 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $900 each. What is the firm's after-tax cost of debt if the tax rate is 32%?

 

Enter your answer as a percentage rounded off to two decimal points.

 

 

1 points  

QUESTION 27

You are planning a trip to London and plan on spending 8,147 pounds. How many dollars will this trip cost you in dollars if one U.S. dollar is worth 0.5508 pounds.

Enter your answer rounded off to two decimal points. Do not enter any currency sign in the answer box.

1 points  

 

QUESTION 28

An investor puts $20,000 in a risk-free asset and $10,000 in the market portfolio. Compute the beta of his portfolio.                               

0.67                       

2                             

1                             

0.33                       

0.50

1 points  

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