Finance Chapter 1-5, 7-10

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1. Barker Corp. has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Barker's required rate of return? Answer

D
| | | |2010 |21.00% | |2009 |-12.50% | |2008 |25.00% | | | |

Answer
B
| |20.08% | | | |20.59% | | | |21.11% | | | |21.64% | | | |22.18% | | 4. Which of the following statements is CORRECT?
Answer
A

| |A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable. | | | |If a stock has a negative beta, its expected return must be negative. | | | |A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5. | | | |According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns. | | | |If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks. | | 5.  Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on the SML, what is the firm's required return? Answer

E

| |13.51% | | | |13.86% | | | |14.21% | | | |14.58% | | | |14.95% | | 6. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

  |A |B | |Price |$25 |$25 | |Expected growth (constant) |10% |5% | |Required return |15% |15% | | | | | |Answer

| |Stock A has a higher dividend yield than Stock B. | | | |Currently the two stocks have the same price, but over time Stock B's price will pass that of A. | | | |Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. | | | |The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. | | | |Stock A's expected dividend at t = 1 is only half that of Stock B. | |

7. Which of the following statements is CORRECT?
Answer
A
| |Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. | | | |The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. | | | |One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free. | | | |One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer. | | | |A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. | | 8. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

  |A |B | |Required return...
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