RISK AND RETURN

7.
LastyearMikebought100sharesofDallasCorporationcommonstockfor$53pershare.
Duringtheyearhereceiveddividendsof$1.45pershare.Thestockiscurrentlysellingfor$60per
share.WhatrateofreturndidMikeearnovertheyear?
(a) 11.7percent.
(b) 13.2percent.
(c) 14.1percent.
(d) 15.9percent.
Answer: D
LevelofDifficulty:2
LearningGoal:1
Topic:HoldingPeriodReturn(Equation5.1)
16.

Whichassetwouldtheriskaversefinancialmanagerprefer?(Seebelow.)
Asset
Initialinvestment
Annualrateofreturn
Pessimistic
Mostlikely
Optimistic
(a)
(b)
(c)
(d)

A
$15,000

B
$15,000

C
$15,000

D
$15,000

8%
12%
14%

5%
12%
13%

3%
12%
15%

11%
12%
14%

AssetA.
AssetB.
AssetC.
AssetD.

Answer: D
LevelofDifficulty:3
LearningGoal:2
Topic:ExpectedReturnandStandardDeviation(Equation5.2andEquation5.3)
17.

TheexpectedvalueandthestandarddeviationofreturnsforassetAis(Seebelow.)
PossibleOutcomes
Pessimistic
Mostlikely
Optimistic
(a)
(b)
(c)
(d)

AssetA
Probability
0.25
0.45
0.30

Returns(%)
10
12
16

12percentand4percent.
12.7percentand2.3percent.
12.7percentand4percent.
12percentand2.3percent.

Answer: B
LevelofDifficulty:3
LearningGoal:2
Topic:ExpectedReturnandStandardDeviation(Equation5.2andEquation5.3)

18.

The_________thecoefficientofvariation,the_________therisk.
(a) lower;lower
(b) higher;lower
(c) lower;higher
(d) morestable;higher
Answer: A
LevelofDifficulty:3
LearningGoal:2
Topic:CoefficientofVariation

19.

GiventhefollowingexpectedreturnsandstandarddeviationsofassetsB,M,Q,andD,which
assetshouldtheprudentfinancialmanagerselect?
Asset
B
M
Q
D
(a)
(b)
(c)
(d)

ExpectedReturn
10%
16%
14%
12%

StandardDeviation
5%
10%
9%
8%

AssetB
AssetM
AssetQ
AssetD

Answer: A
LevelofDifficulty:4
LearningGoal:2
Topic:ExpectedReturnandStandardDeviation(Equation5.4)
20.

Theexpectedvalue,standarddeviationofreturns,andcoefficientofvariationforassetAare
(Seebelow.)
AssetA
PossibleOutcomes
Probability
Pessimistic
0.25
Mostlikely
0.55
Optimistic
0.20
(a)
(b)
(c)
(d)

Returns(%)
5
10
13

10percent,8percent,and1.25,respectively.
9.33percent,8percent,and2.15,respectively.
9.35percent,4.68percent,and2,respectively.
9.35percent,2.76percent,and0.3,respectively.

Answer: D
LevelofDifficulty:4
LearningGoal:2
Topic:ExpectedReturnandStandardDeviation(Equation5.2,Equation5.3andEquation5.4)

28.

Aninvestmentadvisorhasrecommendeda$50,000portfoliocontainingassetsR,J,andK;
$25,000willbeinvestedinassetR,withanexpectedannualreturnof12percent;$10,000will
beinvestedinassetJ,withanexpectedannualreturnof18percent;and$15,000willbe
investedinassetK,withanexpectedannualreturnof8percent.Theexpectedannualreturnof
thisportfoliois
(a) 12.67%.
(b) 12.00%.
(c) 10.00%.
(d) unabletobedeterminedfromtheinformationprovided.
Answer: B
LevelofDifficulty:3
LearningGoal:3
Topic:PortfolioReturn(Equation5.5)

Table5.1
Year
1
2
3
29.

50.

ExpectedReturn(%)
AssetA
AssetB
6
8
7
7
8
6

AssetC
6
7
8

ThecorrelationofreturnsbetweenAssetAandAssetBcanbecharacterizedas(SeeTable5.1)
(a) perfectlypositivelycorrelated.
(b) perfectlynegativelycorrelated.
(c) uncorrelated.
(d) cannotbedetermined.
Answer: B
LevelofDifficulty:4
LearningGoal:3
Topic:CorrelationandPortfolioRisk
Aninvestmentbankerhasrecommendeda$100,000portfoliocontainingassetsB,D,andF.
$20,000willbeinvestedinassetB,withabetaof1.5;$50,000willbeinvestedinassetD,with
abetaof2.0;and$30,000willbeinvestedinassetF,withabetaof0.5.Thebetaofthe
portfoliois
(a) 1.25
(b) 1.33
(c) 1.45
(d) unabletobedeterminedfromtheinformationprovided.
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:PortfolioBeta(Equation5.7)

Youaregoingtoinvest$20,000inaportfolioconsistingofassetsX,Y,andZ,asfollows:
Table5.2
Asset
X
Y
Z
56.

Annual
Return
10%
8%
16%

Probability
0.50
0.25
0.25

Beta
1.2
1.6
2.0

Proportion
0.333
0.333
0.333

GiventheinformationinTable5.2,whatistheexpectedannualreturnofthisportfolio?
(a) 11.4%
(b) 10.0%
(c) 11.0%
(d) 11.7%
Answer: C
LevelofDifficulty:4
LearningGoal:5
Topic:PortfolioBeta(Equation5.7)

57.

ThebetaoftheportfolioinTable5.2,containingassetsX,Y,andZ,is
(a) 1.5.
(b) 2.4.
(c) 1.6.
(d) 2.0.
Answer: C
LevelofDifficulty:4
LearningGoal:5
Topic:PortfolioBeta(Equation5.7)

58.

ThebetaoftheportfolioinTable5.2indicatesthisportfolio
(a) hasmoreriskthanthemarket.
(b) haslessriskthanthemarket.
(c) hasanundeterminedamountofriskcomparedtothemarket.
(d) hasthesameriskasthemarket.
Answer: A
LevelofDifficulty:4

LearningGoal:5
Topic:PortfolioBeta(Equation5.7)
63.

AssetYhasabetaof1.2.Theriskfreerateofreturnis6percent,whilethereturnonthe
marketportfolioofassetsis12percent.Theassetsmarketriskpremiumis
(a) 7.2percent.
(b) 6.0percent.
(c) 13.2percent.
(d) 10percent.
Answer: B
LevelofDifficulty:2
LearningGoal:6
Topic:CapitalAssetPricingModel(CAPM)(Equation5.8)

64.

Inthecapitalassetpricingmodel,thebetacoefficientisameasureof
(a) economicrisk.
(b) diversifiablerisk.
(c) nondiversifiablerisk.
(d) unsystematicrisk.
Answer: C
LevelofDifficulty:2
LearningGoal:6
Topic:CapitalAssetPricingModel(CAPM)

65.

AssetPhasabetaof0.9.Theriskfreerateofreturnis8percent,whilethereturnonthemarket
portfolioofassetsis14percent.Theassetsrequiredrateofreturnis
(a) 13.4percent.
(b) 6.0percent.
(c) 5.4percent.
(d) 10percent.
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:CapitalAssetPricingModel(CAPM)(Equation5.8)

71.

Nicoleholdsthreestocksinherportfolio:A,B,andC.Theportfoliobetais1.40.StockA
comprises15percentofthedollarvalueofherholdingsandhasabetaof1.0.IfNicolesellsall
ofherinvestmentinAandinveststheproceedsintheriskfreeasset,hernewportfoliobetawill
be:
(a) 0.60.
(b) 0.88.
(c) 1.00.
(d) 1.25.
Answer: D
LevelofDifficulty:4
LearningGoal:5
Topic:PortfolioBeta(Equation5.7)

72.

Nicoowns100sharesofstockXwhichhasapriceof$12pershareand200sharesofstockY
whichhasapriceof$3pershare.WhatistheproportionofNicosportfolioinvestedinstock
X?
(a) 77%
(b) 67%
(c) 50%
(d) 33%
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:PortfolioWeights(Equation5.5)

73.

Nicowantstoinvestallofhismoneyinjusttwoassets:theriskfreeassetandthemarket
portfolio.WhatisNicosportfoliobetaifheinvestsaquarterofhismoneyinthemarket
portfolioandtherestintheriskfreeasset?
(a) 0.00
(b) 0.25
(c) 0.75
(d) 1.00
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:PortfolioWeights(Equation5.5)

74.
WhatistheexpectedmarketreturniftheexpectedreturnonassetXis20percent,itsbetais
1.5,andtheriskfreerateis5percent?
(a) 5.0%
(b) 7.5%
(c) 15.0%
(d) 22.5%
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:CapitalAssetPricingModel(CAPM)(Equation5.8)
75.

WhatistheexpectedriskfreerateofreturnifassetX,withabetaof1.5,hasanexpectedreturn
of20percent,andtheexpectedmarketreturnis15percent?
(a) 5.0%
(b) 7.5%
(c) 15.0%
(d) 22.5%
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:CapitalAssetPricingModel(CAPM)(Equation5.8)

76.

WhatistheexpectedreturnforassetXifithasabetaof1.5,theexpectedmarketreturnis15
percent,andtheexpectedriskfreerateis5percent?
(a) 5.0%

(b) 7.5%
(c) 15.0%
(d) 20.0%
Answer: D
LevelofDifficulty:3
LearningGoal:6
Topic:CapitalAssetPricingModel(CAPM)(Equation5.8)
77.

WhatisNicosportfoliobetaifheinvestsanequalamountinassetXwithabetaof0.60,asset
Ywithabetaof1.60,theriskfreeasset,andthemarketportfolio?
(a) 1.20
(b) 1.00
(c) 0.80
(d) 0.60
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:PortfolioBeta(Equation5.7)

ConsiderthefollowingtwosecuritiesXandY.
Table5.3
Security
X
Y
Riskfreeasset

Return
20.0%
10.0%
5.0%

StandardDeviation
20.0%
30.0%

Beta
1.50
1.0

78.

Whichasset(XorY)inTable5.3hastheleasttotalrisk?Whichhastheleastsystematicrisk?
(a) X;X.
(b) X;Y.
(c) Y;X.
(d) Y;Y.
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:SystematicandUnsystematicRisk

79.

UsingthedatafromTable5.3,whatisthesystematicriskforaportfoliowithtwothirdsofthe
fundsinvestedinXandonethirdinvestedinY?
(a) 0.88
(b) 1.17
(c) 1.33
(d) 1.67
Answer: C
LevelofDifficulty:2
LearningGoal:5
Topic:PortfolioBeta(Equation5.7)

80.

UsingthedatafromTable5.3,whatistheportfolioexpectedreturnandtheportfoliobetaifyou
invest35percentinX,45percentinY,and20percentintheriskfreeasset?
(a) 12.5%,0.975
(b) 12.5%,1.975
(c) 15.0%,0.975
(d) 15.0%,1.975
Answer: A
LevelofDifficulty:3
LearningGoal:5
Topic:PortfolioReturnandPortfolioBeta(Equation5.5andEquation5.7)

81.

UsingthedatafromTable5.3,whatistheportfolioexpectedreturnifyouinvest100percentof
yourmoneyinX,borrowanamountequaltohalfofyourowninvestmentattheriskfreerate
andinvestyourborrowingsinassetX?
(a) 15.0%
(b) 22.5%
(c) 25.0%
(d) 27.5%
Answer: D
LevelofDifficulty:4
LearningGoal:5
Topic:PortfolioReturn(Equation5.5)

82.
Whatisthemarketriskpremiumiftheriskfreerateis5percentandtheexpectedmarket
returnisgivenasfollows?

StateofNature
Boom
Average
Recession

Probability
20%
70%
10%

Retur
n
30%
15%
5%

(a) 10.5%
(b) 11.0%
(c) 16.0%
(d) 16.5%
Answer: B
LevelofDifficulty:3
LearningGoal:2
Topic:ExpectedReturnandCAPM(Equation5.2and5.8)
83.

Nicobought100sharesofCiscoSystemsstockfor$24.00pershareonJanuary1,2002.He
receivedadividendof$2.00pershareattheendof2002and$3.00pershareattheendof
2003.Attheendof2004,Nicocollectedadividendof$4.00pershareandsoldhisstockfor
$18.00pershare.WhatwasNicosrealizedreturnduringthethreeyearholdingperiod?
(a) 12.5%
(b) 12.5%
(c) 16.7%
(d) 16.7%
Answer: B
LevelofDifficulty:3
LearningGoal:2
Topic:MeasuringSingleAssetReturn(Equation5.1)

84.

Nicobought100sharesofCiscoSystemsstockfor$24.00pershareonJanuary1,2002.He
receivedadividendof$2.00pershareattheendof2002and$3.00pershareattheendof
2003.Attheendof2004,Nicocollectedadividendof$4.00pershareandsoldhisstockfor
$18.00pershare.WhatwasNicosrealizedreturnduringthethreeyearholdingperiod?What
wasNicoscompoundannualrateofreturn?
(a) 12.5%;4.4%
(b) 12.5%;4.4%
(c) 16.7%;4.4%
(d) 16.7%;4.4%
Answer: B
LevelofDifficulty:4
LearningGoal:2
Topic:MeasuringSingleAssetReturn(Equation5.1)

BOND VALUATION
90.

Afirmhasanissueof$1,000parvaluebondswitha12percentstatedinterestrateoutstanding.
Theissuepaysinterestannuallyandhas10yearsremainingtoitsmaturitydate.Ifbondsof
similarriskarecurrentlyearning8percent,thefirmsbondwillsellfor_________today.
(a) $1,000
(b) $805.20
(c) $851.50
(d) $1,268.20
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:BondPricing(Equation6.7andEquation6.7a)

92.

Afirmhasanissueof$1,000parvaluebondswitha9percentstatedinterestrateoutstanding.
Theissuepaysinterestannuallyandhas20yearsremainingtoitsmaturitydate.Ifbondsof
similarriskarecurrentlyearning11percent,thefirmsbondwillsellfor_________today.
(a) $1,000
(b) $716.67
(c) $840.67
(d) $1,123.33
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:BondPricing(Equation6.7andEquation6.7a)

93.

HewittPackingCompanyhasanissueof$1,000parvaluebondswitha14percentannual
couponinterestrate.Theissuehastenyearsremainingtothematuritydate.Bondsofsimilar
riskarecurrentlysellingtoyielda12percentrateofreturn.ThecurrentvalueofeachHewitt
bondis_________.
(a) $791.00
(b) $1,000
(c) $1,052.24
(d) $1,113.00
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:BondPricing(Equation6.7andEquation6.7a)

96.

Calculatethevalueofa$1,000bondwhichhas10yearsuntilmaturityandpaysquarterly
interestatanannualcouponrateof12percent.Therequiredreturnonsimilarriskbondsis20
percent.
(a) $656.77
(b) $835.45
(c) $845.66
(d) $2,201.08
Answer: A

LevelofDifficulty:4
LearningGoal:5
Topic:BondPricing(Equation6.8andEquation6.8a)
100. Whatistheapproximateyieldtomaturityfora$1,000parvaluebondsellingfor$1,120that
maturesin6yearsandpays12percentinterestannually?
(a) 8.5percent
(b) 9.4percent
(c) 12.0percent
(d) 13.2percent
Answer: B
LevelofDifficulty:3
LearningGoal:6
Topic:YieldtoMaturity(Equation6.7andEquation6.7a)
101. MugwumpIndustrieshasissuedabondwhichhasa$1,000parvalueanda15percentannual
couponinterestrate.Thebondwillmatureintenyearsandcurrentlysellsfor$1,250.Usingthis
information,theyieldtomaturityonMugwumpsbondis_________.
(a) 10.79percent
(b) 11.39percent
(c) 12.19percent
(d) 13.29percent
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:YieldtoMaturity(Equation6.7andEquation6.7a)
102. Whatistheyieldtomaturity,tothenearestpercent,forthefollowingbond:currentpriceis
$908,couponrateis11percent,$1,000parvalue,interestpaidannually,eightyearsto
maturity?
(a) 11percent
(b) 12percent
(c) 13percent
(d) 14percent
Answer: C
LevelofDifficulty:4
LearningGoal:6
Topic:YieldtoMaturity(Equation6.7andEquation6.7a)
103. Alistryingtodecidewhichoftwobondstobuy.BondHisa10percentcoupon,10year
maturity,$1,000par,January1,2000issuepayingannualinterest.BondFisa10percent
coupon,10yearmaturity,$1,000par,January1,2000issuepayingsemiannualinterest.The
marketrequiredreturnforeachbondis10percent.Whenusingpresentvaluetodeterminethe
pricesofthebonds,Alwillfindthat
(a) thereisnodifferenceinprice.
(b) thepriceofFisgreaterthanH.
(c) thepriceofHisgreaterthanF.
(d) heneedsmoreinformationbeforedeterminingtheprices.
Answer: A

LevelofDifficulty:4
LearningGoal:6
Topic:BondPricing(Equation6.8andEquation6.8a)
104. Whatisthecurrentpriceofa$1,000parvaluebondmaturingin12yearswithacouponrateof
14percent,paidsemiannually,thathasaYTMof13percent?
(a) $604
(b) $1,090
(c) $1,060
(d) $1,073
Answer: C
LevelofDifficulty:4
LearningGoal:6
Topic:BondPricing(Equation6.8andEquation6.8a)
105. NicoNelson,amanagementtraineeatalargeNewYorkbasedbankistryingtoestimatethe
realrateofreturnexpectedbyinvestors.Henotesthatthe3monthTbillcurrentlyyields3
percentandhasdecidedtousetheconsumerpriceindexasaproxyforexpectedinflation.What
istheestimatedrealrateofinterestiftheCPIiscurrently2percent?
(a) 5%
(b) 1%
(c) 3%
(d) 2%
Answer: B
LevelofDifficulty:3
LearningGoal:1
Topic:RealRateofInterest(Equation6.1)
106. Considerthefollowingreturnsandyields:U.S.Tbill8%,5yearU.S.Tnote7%,IBM
commonstock15%,IBMAAACorporateBond12%and10yearU.S.Tbond6%.
Basedonthisinformation,theshapeoftheyieldcurveis
(a) upwardsloping.
(b) downwardsloping.
(c) flat.
(d) normal.
Answer: B
LevelofDifficulty:3
LearningGoal:1
Topic:TermStructureofInterestRates
107. WhatisthenominalrateofreturnonanIBMbondiftherealrateofinterestis3percent,the
inflationriskpremiumis2percent,theU.S.Tbillrateis5percent,thematurityriskpremium
ontheIBMbondis3percent,thedefaultriskpremiumontheIBMbondis2percent,andthe
liquidityriskpremiumonthebondis1percent?
(a) 16%
(b) 13%
(c) 11%
(d) 9%
Answer: C
LevelofDifficulty:3

LearningGoal:1
Topic:NominalRateofInterest
Table6.1
Usethefollowinginformationtoanswerquestions#108through#110.
EST
Company Coupon
Maturity
LastPrice LastYield Spread
Ford(F)
11.0
July31,2009
65.50
?
104

EST
UST
10

VOL.
(000s)
5,100

108. Onthistradingday,thenumberofMcLeodbondswhichchangedhandswas(Table6.1)
(a) 5,100.
(b) 51,000.
(c) 510,000.
(d) 5,100,000.
Answer: D
LevelofDifficulty:2
LearningGoal:3
Topic:CorporateBondQuotes
109. Assumethisbondsfacevalueis$1,000.Whatisthebondscurrentmarketprice(Table6.1)?
(a) $65.00
(b) $655.00
(c) $650.00
(d) $6,550.00
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:CorporateBondQuotes
110.

Whatisthelastyieldforthisbond(Table6.1)?
(a) 11.0%
(b) 14.2%
(c) 16.8%
(d) 18.9%
Answer: C
LevelofDifficulty:2
LearningGoal:3
Topic:CorporateBondQuotes

111. NicoCorpissuedbondsbearingacouponrateof12percent,paycouponssemiannually,have3
yearsremainingtomaturity,andarecurrentlypricedat$940perbond.Whatistheyieldto
maturity?
(a) 12.00%
(b) 13.99%
(c) 14.54%
(d) 15.25%
Answer: C
LevelofDifficulty:3
LearningGoal:6
Topic:SemiAnnualYieldtoMaturity(Equation6.7andEquation6.7a)
JiaHuaEnterpriseswantstoissuesixty20year,$1,000parvalue,zerocouponbonds.Ifeachbondis
pricedtoyield7percent,howmuchwillJiaHuareceive(ignoringissuancecosts)whenthe
bondsarefirstsold?
(a) $11,212
(b) $12,393
(c) $15,505

(d) $18,880
(e) $20,000
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:BondPricing(Equation6.7andEquation6.7a)
114. OnJanuary1,2002,ZhengCorporationwillissuenewbondstofinanceitsexpansionplans.In
itseffortstopricetheissue,ZhengCorporationhasidentifiedacompanyofsimilarriskwithan
outstandingbondissuethathasan8percentcouponratethatisdueJanuary1,2017.Thisfirms
bondscurrentlyaresellingfor$1,091.96.Ifinterestispaidsemiannuallyforbothbonds,what
mustthecouponrateofthenewbondsbeinorderfortheissuetosellatpar?
(a) 5.75%
(b) 6.00%
(c) 6.50%
(d) 7.00%
Answer: D
LevelofDifficulty:4
LearningGoal:5
Topic:BondPricing(Equation6.8andEquation6.8a)

STOCK VALUATION
7.
An8percentpreferredstockwithamarketpriceof$110pershareanda$100parvaluepays
acashdividendof_________.
(a) $4.00
(b) $8.00
(c) $8.80
(d) $80.00
Answer: B
LevelofDifficulty:1
LearningGoal:2
Topic:FeaturesofPreferredStock
15.

36.

Afirmhasanoutstandingissueof1,000sharesofpreferredstockwitha$100parvalueandan
8percentannualdividend.Thefirmalsohas5,000sharesofcommonstockoutstanding.Ifthe
stockiscumulativeandtheboardofdirectorshaspassedthepreferreddividendfortheprior
twoyears,howmuchmustthepreferredstockholdersbepaidpriortopayingdividendsto
commonstockholders?
(a) $8,000
(b) $16,000
(c) $24,000
(d) $25,000
Answer: C
LevelofDifficulty:3
LearningGoal:2
Topic:CumulativePreferredStock
Afirmissued10,000sharesof$2parvaluecommonstock,receivingproceedsof$40per
share.Theaccountingentryforthepaidincapitalinexcessofparaccountis
(a) $200,000.
(b) $380,000.
(c) $400,000.
(d) $800,000.
Answer: B
LevelofDifficulty:3

LearningGoal:3
Topic:AccountingforCommonStock
37.

Afirmissued10,000sharesofnoparvaluecommonstock,receivingproceedsof$40per
share.Theaccountingentryis
(a) $0inthecommonstockaccount.
(b) $0inthepaidincapitalinexcessofparaccount.
(c) $400,000inthecommonstockaccount.
(d) $400,000inthepaidincapitalinexcessofparaccount.
Answer: C
LevelofDifficulty:3
LearningGoal:3
Topic:AccountingforCommonStock

43.

Afirmhasthebalancesheetaccounts,commonstock,andpaidincapitalinexcessofpar,with
valuesof$10,000and$250,000,respectively.Thefirmhas10,000commonsharesoutstanding.
Ifthefirmhadaparvalueof$1,thestockoriginallysoldfor
(a) $24/share.
(b) $25/share.
(c) $26/share.
(d) $30/share.

Answer: C
LevelofDifficulty:4
LearningGoal:3
Topic:AccountingforCommonStock
44.
Afirmhasthebalancesheetaccounts,commonstock,andpaidincapitalinexcessofpar,
withvaluesof$40,000and$500,000,respectively.Thefirmhas40,000commonsharesoutstanding.
Ifthefirmhadaparvalueof$1,thestockoriginallysoldfor
(a) $11.50/share.
(b) $12.50/share.
(c) $13.50/share.
(d) $15.50/share.
Answer: C
LevelofDifficulty:4
LearningGoal:3
Topic:AccountingforCommonStock
47.

Afirmhasanissueofpreferredstockoutstandingthathasastatedannualdividendof$4.The
requiredreturnonthepreferredstockhasbeenestimatedtobe16percent.Thevalueofthe
preferredstockis_________.
(a) $64
(b) $16
(c) $25
(d) $50
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:PreferredStockValuation(Equation7.3)

48.
Afirmhasanexpecteddividendnextyearof$1.20pershare,azerogrowthrateofdividends,
andarequiredreturnof10percent.Thevalueofashareofthefirmscommonstockis_________.
(a) $120
(b) $10
(c) $12
(d) $100
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:ZeroGrowthValuationModel(Equation7.3)
49.

52.

Afirmhasanissueofpreferredstockoutstandingthathasastatedannualdividendof$4.The
requiredreturnonthepreferredstockhasbeenestimatedtobe16percent.Thevalueofthe
preferredstockis_________.
(a) $64
(b) $16
(c) $25
(d) $50
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:PreferredStockValuation(Equation7.3)
EmmyLou,Inc.hasanexpecteddividendnextyearof$5.60pershare,agrowthrateof
dividendsof10percent,andarequiredreturnof20percent.ThevalueofashareofEmmyLou,
Inc.scommonstockis_________.
(a) $28.00
(b) $56.00
(c) $22.40
(d) $18.67
Answer: B
LevelofDifficulty:3
LearningGoal:4
Topic:ConstantGrowthValuationModel(Equation7.4andEquation7.5)

53.

Afirmhasexperiencedaconstantannualrateofdividendgrowthof9percentonitscommon
stockandexpectsthedividendpershareinthecomingyeartobe$2.70.Thefirmcanearn12
percentonsimilarriskinvolvements.Thevalueofthefirmscommonstockis_________.
(a) $22.50/share
(b) $9/share
(c) $90/share
(d) $30/share
Answer: C
LevelofDifficulty:3
LearningGoal:4
Topic:ConstantGrowthValuationModel(Equation7.4andEquation7.5)

54.

Acommonstockcurrentlyhasabetaof1.3,theriskfreerateisanannualrateof6percent,and
themarketreturnisanannualrateof12percent.Thestockisexpectedtogenerateaconstant
dividendof$5.20pershare.Atoxicspillresultsinalawsuitandpotentialfines,andthebetaof
thestockjumpsto1.6.Thenewequilibriumpriceofthestock
(a) willbe$37.68.
(b) willbe$43.33.
(c) cannotbedeterminedfromtheinformationgiven.
(d) willbe$33.33.
Answer: D
LevelofDifficulty:3
LearningGoal:4
Topic:ConstantGrowthValuationModelandCAPM(Equation7.4,Equation7.5,andEquation
7.9)

55.

Acommonstockcurrentlyhasabetaof1.7,theriskfreerateis7percentannually,andthe
marketreturnis12percentannually.Thestockisexpectedtogenerateaconstantdividendof
$6.70pershare.Apendinglawsuithasjustbeendismissedandthebetaofthestockdropsto
1.4.Thenewequilibriumpriceofthestock
(a) willbe$55.83.
(b) willbe$43.23.
(c) willbe$47.86.
(d) cannotbedeterminedfromtheinformationgiven.
Answer: C
LevelofDifficulty:3
LearningGoal:4
Topic:ConstantGrowthValuationModelandCAPM(Equation7.4,Equation7.5,andEquation
7.9)

67.

ThecurrentpriceofDEFCorporationstockis$26.50pershare.Earningsnextyearshouldbe
$2pershareanditshouldpaya$1dividend.TheP/Emultipleis15timesonaverage.What
pricewouldyouexpectforDEFsstockinthefuture?
(a) $13.50
(b) $15.00
(c) $26.50
(d) $30.00

80.

Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:P/EMultipleValuationApproach
YouareplanningtopurchasethestockofTedsShedsInc.andyouexpectittopayadividend
of$3in1year,$4.25in2years,and$6.00in3years.Youexpecttosellthestockfor$100in3
years.Ifyourrequiredreturnforpurchasingthestockis12percent,howmuchwouldyoupay
forthestocktoday?
(a) $75.45
(b) $77.24
(c) $81.52
(d) $85.66
Answer: C
LevelofDifficulty:3

LearningGoal:4
Topic:BasicValuationModel(Equation7.2)
81.

NicoCorporationscommonstockisexpectedtopayadividendof$3.00foreverandcurrently
sellsfor$21.42.Whatistherequiredrateofreturn?
(a) 10%
(b) 12%
(c) 13%
(d) 14%
Answer: D
LevelofDifficulty:2
LearningGoal:4
Topic:ZeroGrowthValuationModel(Equation7.3)

82.

ZackisconsideringpurchasingthestockofPepsiColabecausehereallylovesthetasteof
Pepsi.WhatshouldZackbewillingtopayforPepsitodayifitisexpectedtopaya$2dividend
inoneyearandheexpectsdividendstogrowthat5percentindefinitely?Zackrequiresa12
percentreturntomakethisinvestment.
(a) $28.57
(b) $29.33
(c) $31.43
(d) $43.14
Answer: A
LevelofDifficulty:2
LearningGoal:4
Topic:ConstantGrowthValuationModel(Equation7.4andEquation7.5)

83.

NicoCorporationscommonstockcurrentlysellsfor$180pershare.Nicojustpaidadividend
of$10.18anddividendsareexpectedtogrowataconstantrateof6percentforever.Ifthe
requiredrateofreturnis12percent,whatwillNicoCorporationsstocksellforoneyearfrom
now?
(a) $180.00
(b) $187.04
(c) $195.40
(d) $190.80
Answer: C
LevelofDifficulty:4
LearningGoal:4
Topic:ConstantGrowthValuationModel(Equation7.4andEquation7.5)
84.
TangshanChinaCompanysstockiscurrentlysellingfor$80.00pershare.The
expecteddividendoneyearfromnowis$4.00andtherequiredreturnis13percent.Whatis
Tangshansdividendgrowthrateassumingthatdividendsareexpectedtogrowataconstant
rateforever?
(a) 8%
(b) 9%
(c) 10%
(d) 11%
Answer: A
LevelofDifficulty:3

LearningGoal:4
Topic:ConstantGrowthValuationModel(Equation7.4andEquation7.5)
85.

TangshanChinasstockiscurrentlysellingfor$160.00pershareandthefirmsdividendsare
expectedtogrowat5percentindefinitely.AssumingTangshanChinasmostrecentdividend
was$5.50,whatistherequiredrateofreturnonTangshansstock?
(a) 7.3%
(b) 8.6%
(c) 9.5%
(d) 10.6%
Answer: B
LevelofDifficulty:3
LearningGoal:4
Topic:ConstantGrowthValuationModel(Equation7.4andEquation7.5)

86.

NicoCustomCyclescommonstockcurrentlypaysnodividends.Thecompanyplanstobegin
payingdividendsbeginning3yearsfromtoday.Thefirstdividendwillbe$3.00anddividends
willgrowat5percentperyearthereafter.Givenarequiredreturnof15percent,whatwould
youpayforthestocktoday?
(a) $26.00
(b) $19.73
(c) $30.00
(d) $22.68
Answer: D
LevelofDifficulty:4
LearningGoal:4
Topic:VariableGrowthValuationModel(Equation7.6)

87.

JiasFashionsrecentlypaida$2annualdividend.Thecompanyisprojectingthatitsdividends
willgrowby20percentnextyear,12percentannuallyforthetwoyearsafterthat,andthenat6
percentannuallythereafter.Basedonthisinformation,howmuchshouldJiasFashions
commonstocksellfortoday?
(a) $54.90
(b) $60.80
(c) $66.60
(d) $69.30

Answer: C
LevelofDifficulty:4
LearningGoal:4
Topic:VariableGrowthValuationModel(Equation7.6)
Table7.1
YTD%CHG
5.1

52WEEK
HI
LO
48.72 20.10

YLD
STOCK(SYM)
FORD(F)

Div
1.00

%
3.3

VOL
PE
100s
18
20,92
5

CLOSE
30.20

NET
CHG
0.56

88.

AccordingtoTable7.1,Fordscommonstockmusthaveclosedat_________pershareonthe
previoustradingday.
(a) $29.64
(b) $30.76
(c) $30.99
(d) $31.55
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:CommonStockQuotation

89.

AccordingtoTable7.1,theexpecteddividendpershareforFordis
(a) $0.25.
(b) $1.00.
(c) $2.00.
(d) $3.30.
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:CommonStockQuotation

90.

ReferringtoTable7.1,ifweassumethatFordsdividendswillgrowatarateof10percent
forever,therequiredreturnonFordsstockwouldbe
(a) 7.4%.
(b) 8.9%.
(c) 11.0%.
(d) 13.6%.
Answer: D
LevelofDifficulty:3
LearningGoal:3
Topic:CommonStockQuotation

91.

BasedonTable7.1,Fordsearningspershareare
(a) $0.80.
(b) $1.21.
(c) $1.68.
(d) $1.91.
Answer: C
LevelofDifficulty:3
LearningGoal:3
Topic:CommonStockQuotation

92.
BasedontheinformationgiveninTable7.1,thenumberofsharesofFordthatweretradedon
thepreviousdaywas
(a) 2,092.
(b) 20,925.
(c) 209,250.
(d) 2,092,500.

Answer: D
LevelofDifficulty:2
LearningGoal:3
Topic:CommonStockQuotation
93.

NicoCorporationexpectstogeneratefreecashflowsof$200,000peryearforthenextfive
years.Beyondthattime,freecashflowsareexpectedtogrowataconstantrateof5percentper
yearforever.Ifthefirmsaveragecostofcapitalis15percent,themarketvalueofthefirms
stockis$500,000,andNicohasahalfmillionsharesofstockoutstanding,whatisthevalueof
Nicosstock?
(a) $12.15
(b) $121.50
(c) $11.64
(d) $116.40
Answer: A
LevelofDifficulty:4
LearningGoal:5
Topic:FreeCashFlowValuationModel(Equation7.7andEquation7.8)

94.

Atyearend,TangshanChinaCompanybalancesheetshowedtotalassetsof$60million,total
liabilities(includingpreferredstock)of$45million,and1,000,000sharesofcommonstock
outstanding.Basedonthisinformation,Tangshansbookvaluepershareofcommonstockis
_________.
(a) $105.00
(b) $10.50
(c) $15.00
(d) $150.00
Answer: C
LevelofDifficulty:2
LearningGoal:5
Topic:BookValueofCommonStock

95.

Atyearend,TangshanChinaCompanybalancesheetshowedtotalassetsof$60million,total
liabilities(includingpreferredstock)of$45million,and1,000,000sharesofcommonstock
outstanding.IfTangshancouldsellitsassetsfor$52.5million,Tangshansliquidationvalue
pershareofcommonstockis_________.
(a) $15.00
(b) $7.50
(c) $52.50
(d) $75.00
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:LiquidationValueofCommonStock

96.
Atyearend,TangshanChinaCompanybalancesheetshowedtotalassetsof$60million,total
liabilities(includingpreferredstock)of$45million,and1,000,000sharesofcommonstock
outstanding.Nextyear,Tangshanisprojectingthatitwillhavenetincomeof$1.5million.Ifthe
averagePEmultipleinTangshansindustryis15,whatshouldbethepriceofTangshansstock?
(a) $15.00

(b) $22.50
(c) $52.50
(d) $75.00
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:PEMultipleValuationApproach