1. Which of the following is the only risk that is relevant to a rational, diversified investor?
a) Unsystematic risk
b) Market risk
c) Diversifiable risk
2. Risk is indicated by variability, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.
a) true
b) false
3. The Beta coefficient is a measure of_______
a) Systematic risk
b) Unsystematic risk
c) Diversifiable risk
4. The value that represents the firm’s average cost of funds, which is the average return required by firm’s investors is known as:
a) The cost of capital
b) The required rate of return of the firm
c) The weighted average cost of capital (WACC)
d) All of the above
5. A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If an investor's simple annual required rate of return is 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond? (Round the answer to two decimal places.)
6. Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If an investor requires a simple annual rate of return of 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond? (Round the answer to two decimal places.)
7. Devine Divots issued a bond a few years ago. The bond has a face value equal to $1,000 and pays investors $30 interest every six months. The bond has eight years remaining until maturity. If an investor requires a 7 percent rate of return to invest in this bond, what is the maximum price the investor should be willing to pay to purchase the bond? (Round the answer to two decimal places.)
8. You recently purchased a stock for $25 that produces a 10% rate of return. You expect dividends of $3 every year for the next 5 years. What is the present value of the stock?
9. Your broker offers to sell you some shares of Winglet & Company common stock, which paid a dividend of $2 yesterday. You expect the dividend to grow at a rate of 5 percent per year into perpetuity. Given that the appropriate discount rate is 12 percent, what is the market value of Winglet’s stock?
10. Snyder Computer Chips, Inc. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15 percent during the next two years, at 13 percent in the third year, and at a constant rate of 6 percent thereafter. Snyder’s last dividend was $1.15, and the required rate of return on the stock is 12 percent. Calculate the current stock price.
11. Super Solutions Inc. is a constant growth firm, which just paid a dividend of $3.00, sells for $33.00 per share, and has a growth rate of 6 percent. Which of the following is the cost of retained earnings using the discounted cash flow (DCF) approach? (Round off the answer to two decimal places.)
12. Brother’s and Sister’s Inc. has a capitalization structure of $5 million in long-term debt at a 5% interest rate, and $45 million in common equity at a 10% ROE. Calculate the weighted cost of capital (WACC) for this company.