Problem 1: Which of the following statements is correct?
- "Characteristics line" is another name for the Security Market Line.
- The characteristics line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
- The slope of the characteristic line is the stock's standard deviation.
- The distance of the plot points from the characteristics line is a measure of the stock's market risk.
- The distance of the plot points from the characteristics line is a measure of the stock's discounted diversifiable risk.
Problem 2: A share of common stock has just paid a dividend of $2. If the expected long-run growth rate for this stock is 5%, and if investors required rate of return is 10.5%, what is the stock price?
- $35.39
- $38.80
- $37.23
- $38.18
- $39.14
Problem 3: If Do = $2.75, g (which is constant) = 3%, and Po - $36, what is the stock's expeced total return for the coming year?
- 9.82%
- 10.07%
- 10.33%
- 10.60%
- 10.87%
Problem 4: You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6%, the cost of preferred is 7.5%, and the cost of retained earnings is 13.25%. the firm will not be issuing any new stock. What is its WACC?
- 9.48%
- 9.78%
- 10.07%
- 10.37%
- 10.68%