Question1: A stock has a required return of 12.25 percent. The beta of the stock is 1.15 and the risk free rate is 5%. Determine the market risk premium?
[A] 15.00%
[B] 6.30%
[C] 7.25%
[D] 1.30%
[E] 6.50%
Question2: If a stock's expected return exceeds its required return, this suggests that
[A] The company is probably not trying to maximize price per share.
[B] The stock is probably a good buy.
[C] Dividends are not being declared.
[D] The stock is experiencing supernormal growth.
[E] The stock should be sold.
Question3: Which of the following statements is CORRECT?
[A] The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of common stock.
[B] The stock valuation model, P0 = D1/ (rs g), cannot be used for firms that have negative growth rates.
[C] The stock valuation model, P0 = D1/ (rs g), can be used only for firms whose growth rates exceed their required return.
[D] If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but the two classes must have the same voting rights.
[D] An IPO occurs whenever a company buys back its stock on the open market.
Question4: A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share (i.e., D5 = $1.00). Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5%. The required rate of return on the company's stock is expected to remain constant. Calculate the current stock price?
[A] $ 9.89
[B] $10.98
[C] $11.53
[D] $ 7.36
[E] $ 8.62
Question5: The risk-free rate, rRF, is 6 percent. The overall stock market has an expected return of 12%. Hazlett, Inc. has a beta of 1.2. Calculate the required return of Hazlett, Inc. stock?
[A] 12.8%
[B] 13.2%
[C] 13.5%
[D] 12.0%
[E] 12.2%