Question 1: GoodBuy stock has a beta of 1.75. The expected return on GoodBuy is 20%, while the expected return on the market portfolio is only 13%. The risk-free rate is 3%. Because GoodBuy lies __________ the SML, it is considered __________.
a. below; overpriced
b. below; underpriced
c. above; underpriced
d. above; overpriced
e. on; correctly priced
Question 2: Typically when valuing an asset, adjustments for risk are made by adjusting:
a. the number of time periods
b. the asset's expected cash flows
c. the asset's required return
d. the asset's terminal value
e. none of the above
Question 3: The value of long-term bonds is __________ sensitive to changes in __________ than short-term bonds.
a. more; interest rates
b. more; GDP growth
c. not; interest rates
d. less; GDP growth
e. less; interest rates
Question 4: Zoomers Inc. paid an annual dividend of $1.20 yesterday. If future dividends are expected to grow at a rate of 4 percent, and the required rate of return on this stock is 14 percent, the fair price of this stock today is:
a. $8.57
b. $12.00
c. $12.48
d. $13.68
e. None of the above
Question 5: Free cash flow represents the cash amount that a firm could distribute to __________.
a. bondholders
b. common stockholders
c. preferred shareholders
d. all of the above
e. none of the above