Problem 1. Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock?
- 4.47%
- 5.50%
- 5.54%
- 6.77%
- 12.30%
Problem 2. You are comparing stock A to stock B. Given the following information, which one of these two stocks should you prefer and why?
- Stock A; because it has an expected return of 7% and appears to be more risky.
- Stock A; because it has a higher expected return and appears to be less risky than stock B.
- Stock A; because it has a slightly lower expected return but appears to be significantly less risky than stock B.
- Stock B; because it has a higher expected return and appears to be just slightly more risky than stock A.
- Stock B; because it has a higher expected return and appears to be less risky than stock A.
Problem 3. The opportunity set of portfolios is:
- all possible return combinations of those securities.
- all possible risk combinations of those securities.
- all possible risk-return combinations of those securities.
- the best or highest risk-return combination.
- the lowest risk-return combination.
Problem 4. When stocks with the same expected return are combined into a portfolio:
- the expected return of the portfolio is less than the weighted average expected return of the stocks.
- the expected return of the portfolio is greater than the weighted average expected return of the stocks.
- the expected return of the portfolio is equal to the weighted average expected return of the stocks.
- there is no relationship between the expected return of the portfolio and the expected return of the stocks.
- None of the above.
Problem 5. What is the expected return on a portfolio which is invested 20% in stock A, 50% in stock B, and 30% in stock C?
- 7.40%
- 8.25%
- 8.33%
- 9.45%
- 9.50%
Problem 6. The constant dividend growth model is:
- generally used in practice because most stocks have a constant growth rate.
- generally used in practice because the historical growth rate of most stocks is constant.
- generally not used in practice because most stocks grow at a non constant rate.
- generally not used in practice because the constant growth rate is usually higher than the required rate of return.
- based on the assumption Dow 30 represent a good estimate of the market index.
Problem 7. Nu-Tek, Inc. is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth. As a result it is going to reduce its annual dividend by 10% a year for the next three years. After that, it will maintain a constant dividend of $.70 a share. Last month, the company paid $1.80 per share. What is the value of this stock if the required rate of return is 13%?
- $6.79
- $7.22
- $8.22
- $8.87
- $9.01
Problem 8. Last week, Railway Cabooses paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 14%?
- $4.50
- $7.71
- $10.80
- $15.60
- $27.00
Problem 9. One basis point is equal to:
- .01%.
- .10%.
- 1.0%.
- 10%.
- 100%.
Problem 10. Beaksley, Inc. is a very cyclical type of business which is reflected in its dividend policy. The firm pays a $2.00 a share dividend every other year. The last dividend was paid last year. Five years from now, the company is repurchasing all of the outstanding shares at a price of $50 a share. At an 8% rate of return, what is this stock worth today?
- $34.03
- $37.21
- $43.78
- $48.09
- $53.18