Corporate Finance, 12e (Ross)
1) Alpha Industries stock sold for $39 a share at the beginning of the year. During the year, the
company paid a dividend of $3 a share and then ended the year with a stock price of $37. The
change in the stock price is best described as a:
A) capital gain.
B) positive total dollar return.
C) capital loss.
D) negative total dollar return.
E) negative dividend yield.
2) The capital gains yield plus the dividend yield on a security is called the:
A) variance of returns.
B) geometric return.
C) average period return.
D) current yield.
E) total return.
3) A portfolio of small-company common stocks, as used in this course, is best described as the
stocks of the firms which:
A) represent the smallest twenty percent of the companies listed on the NYSE.
B) have gone public within the past five years.
C) are too small to be listed on the NYSE.
D) are included in the S&P 500 index.
E) trade publicly for $5 a share or less.
4) Based on the period of 1926 through 2017, ________ have tended to outperform other
securities over the long-term.
A) U.S. Treasury bills
B) large-company stocks
C) long-term corporate bonds
D) small-company stocks
E) long-term government bonds
5) Based on the period of 1926 through 2017, U.S. Treasury bills have produced annual rates of
return that:
A) ranged from −1 percent to +15 percent.
B) ranged from −1 percent to +5 percent.
C) were negative only during the Great Depression.
D) have always been positive.
E) never exceeded 6 percent.
6) Another term that refers to the average rate of return is the:
A) variance.
B) standard deviation.
C) real return.
D) mean.
E) histogram.
7) Which one of the following types of securities has tended to produce the lowest real rate of
return for the period 1926 through 2017?
A) U.S. Treasury bills
B) Long-term government bonds
C) Small-company stocks
D) Large-company stocks
E) Long-term corporate bonds
8) On average, for the period 1926 through 2017:
A) the real rate of return on U.S. Treasury bills has been negative.
B) small-company stocks have underperformed large-company stocks.
C) long-term government bonds have produced higher returns than long-term corporate bonds.
D) the excess return on long-term corporate bonds has exceeded the excess return on long-term
government bonds.
E) the excess return on large-company stocks has exceeded the excess return on small-company
stocks.
9) Over the period of 1926 through 2017, the annual rate of return on ________ has been more
volatile than the annual rate of return on ________.
A) large-company stocks; small-company stocks
B) U.S. Treasury bills; small-company stocks
C) U.S. Treasury bills; long-term government bonds
D) long-term corporate bonds; small-company stocks
E) large-company stocks; long-term corporate bonds
10) Which one of the following is a correct ranking of securities based on their volatility over the
period of 1926 to 2017? Rank from highest to lowest volatility.
A) Large-company stocks, intermediate-term government bonds, long-term government bonds
B) Small-company stocks, long-term corporate bonds, large-company stocks
C) Long-term government bonds, long-term corporate bonds, small-company stocks
D) Small-company stocks, large-company stocks, long-term corporate bonds
E) Long-term corporate bonds, large-company stocks, U.S. Treasury bills
11) Over the period of 1926 to 2017, small-company stocks had an average return of ________
percent.
A) 14.8
B) 15.2
C) 17.3
D) 14.6
E) 16.5
12) Over the period of 1926 to 2017, the average rate of inflation was ________ percent.
A) 2.0
B) 2.7
C) 3.0
D) 3.8
E) 4.3
13) The average annual return on long-term corporate bonds for the period of 1926 to 2017 was
________ percent.
A) 3.8
B) 5.8
C) 6.4
D) 7.9
E) 8.4
14) The average annual return on small-company stocks was about ________ percentage points
greater than the average annual return on large-company stocks over the period of 1926 to 2017.
A) 3.4
B) 4.4
C) 5.4
D) 6.4
E) 7.4
15) The average excess return on U.S. Treasury bills over the period of 1926 to 2017 was
________ percent.
A) .4
B) 1.6
C) 2.2
D) 3.1
E) 3.8
16) The excess return is computed by ________ the average return for the investment.
A) subtracting the inflation rate from
B) adding the inflation rate to
C) subtracting the average return on the U.S. Treasury bill from
D) adding the average return on the U.S. Treasury bill to
E) subtracting the average return on long-term government bonds from
17) Which one of the following is a correct statement concerning the excess return?
A) The greater the volatility of returns, the greater the expected excess return.
B) The lower the volatility of returns, the greater the expected excess return.
C) The lower the average rate of return, the greater the excess return.
D) The excess return is not correlated to the average rate of return.
E) The excess return is not affected by the volatility of returns.
18) Which one of the following statements concerning the standard deviation is correct?
A) The standard deviation is a measure of total return.
B) The higher the standard deviation, the higher the expected return.
C) The standard deviation varies in direct relation to increases in dividend yield.
D) The higher the standard deviation, the lower the risk.
E) The lower the standard deviation, the less certain the rate of return in any one given year.
19) The standard deviation of small-company stocks:
A) had an average value of about 20 percent for the period 1926 to 2017.
B) is roughly equivalent to the standard deviation on stocks of all sizes.
C) is about ten times as large as the standard deviation of U.S. Treasury bills.
D) is less than the standard deviation on large-company stocks.
E) produces a narrow normal distribution curve.
20) Capital market history shows us that a correct ordering of the average return by asset classes,
from lowest to highest, is:
A) corporate bonds, U.S. Treasury bills, small-company stocks, large-company stocks.
B) U.S. Treasury bills, small-company stocks, large-company stocks, government bonds.
C) government bonds, U.S. Treasury bills, large-company stocks, small-company stocks.
D) U.S. Treasury bills, government bonds, corporate bonds, large-company stocks.
E) U.S. Treasury bills, long-term government bonds, intermediate-term government bonds,
small-company stock.
21) The average squared difference between the actual return and the average return is called the:
A) volatility return.
B) variance.
C) standard deviation.
D) risk premium.
E) excess return.
22) The standard deviation for a set of stock returns can be calculated as the:
A) positive square root of the average return.
B) average squared difference between the actual return and the average return.
C) positive square root of the variance.
D) average return divided by N minus one, where N is the number of returns.
E) variance squared.
23) A symmetric, bell-shaped frequency distribution that is completely defined by its mean and
standard deviation is the ________ distribution.
A) gamma
B) Poisson
C) bimodal
D) normal
E) uniform
24) The variance of returns is computed by dividing the sum of the:
A) squared deviations by the number of returns minus one.
B) average returns by the number of returns minus one.
C) average returns by the number of returns plus one.
D) squared deviations by the average rate of return.
E) squared deviations by the number of returns plus one.
25) The Sharpe ratio is computed as the average:
A) equity risk premium divided by the standard deviation.
B) squared deviation divided by the average excess return.
C) excess return divided by the variance of the returns.
D) equity risk premium divided by the variance.
E) squared deviation divided by the (Number of returns − 1).
26) The average compound return earned per year over a multi-year period is called the
________ average return.
A) arithmetic
B) standard
C) variant
D) geometric
E) real
27) The return earned in an average year over a multi-year period is called the ________ average
return.
A) arithmetic
B) standard
C) variant
D) geometric
E) real
28) Of these countries, which one has the highest historical equity risk premium for the period
1900-2010?
A) Italy
B) Ireland
C) Switzerland
D) Spain
E) Norway
29) Which country has the highest Sharpe ratio based on historical equity risk premiums and
standard deviations of returns for the period 1900-2010?
A) Italy
B) Australia
C) United States
D) Germany
E) Norway
30) In estimating the future equity risk premium, it is important to include assumptions about
the:
A) historical distribution of returns on derivative securities only.
B) future risk environment only.
C) amount of risk aversion of future investors only.
D) historical distribution of returns on derivative securities and the future risk environment.
E) future risk environment and the amount of risk aversion of future investors.
31) From November 2007 through January 2009, the S&P 500 Index lost approximately what
percent of its value?
A) 37
B) 51
C) 43
D) 33
E) 45
32) In 2008, which country experienced a decline in its stock market value in excess of 90
percent?
A) India
B) Russia
C) China
D) United States
E) Iceland
33) In 2008, which asset class had the highest rate of return in the U.S.?
A) Small-company stocks
B) Long-term U.S. Treasury bonds
C) Large-company stocks
D) Short-term U.S. Treasury bonds
E) High-quality long-term corporate bonds
34) One year ago, you purchased a stock at a price of $32.50. The stock pays quarterly dividends
of $.40 per share. Today, the stock is worth $34.60 per share. What is the total dollar return per
share to date from this investment?
A) $3.40
B) $3.70
C) $2.10
D) $2.50
E) $3.80
35) Six months ago, you purchased 100 shares of stock in ABC Co. at a price of $43.89 a share.
ABC stock pays a quarterly dividend of $.10 a share. Today, you sold all your shares for $45.13
per share. What is the total amount of your capital gains on this investment?
A) $1.24
B) $1.64
C) $40.00
D) $124.00
E) $164.00
36) A year ago, you purchased 300 shares of New Tech stock at a price of $49.03 per share. The
stock pays an annual dividend of $.10 per share. Today, you sold all your shares for $58.14 per
share. What is your total dollar return on this investment?
A) $2,755
B) $2,733
C) $2,703
D) $2,763
E) $3,006
37) You purchased 300 shares of stock at a price of $21.72 per share. Over the last year, you
have received total dividend income of $210. What is the dividend yield?
A) 3.06 percent
B) 3.22 percent
C) 3.17 percent
D) 2.92 percent
E) 2.94 percent
38) Winslow, Inc., stock is currently selling for $40 a share. The stock has a dividend yield of
3.8 percent. How much dividend income will you receive per year if you purchase 600 shares of
this stock?
A) $152
B) $790
C) $329
D) $912
E) $1,053
39) One year ago, you purchased a stock at a price of $32 a share. Today, you sold the stock and
realized a total return of 14.62 percent. Your capital gain was $3.48 a share. What was your
dividend yield on this stock?
A) 2.25 percent
B) 3.75 percent
C) 3.35 percent
D) 2.85 percent
E) 4.35 percent
40) You just sold 700 shares of Alcove stock at a price of $34.08 a share. Last year you paid
$39.20 a share to buy this stock. You received dividends totalling $1.04 per share. What is your
total capital gain on this investment?
A) −$3,584
B) −$3,672
C) −$3,544
D) −$2,856
E) −$2,608
41) You purchased 300 shares of Deltona stock for $43.90 a share. You have received a total of
$630 in dividends and $14,620 in proceeds from selling the shares. What is your capital gains
yield on this stock?
A) 6.23 percent
B) 11.01 percent
C) 17.68 percent
D) 9.55 percent
E) 15.79 percent
42) Today, you sold 300 shares of SLG stock and realized a total return of 12.5 percent. You
purchased the shares one year ago at a price of $27.43 a share. You have received a total of $192
in dividends. What is your capital gains yield on this investment?
A) 14.80 percent
B) 9.39 percent
C) 6.67 percent
D) 10.17 percent
E) 11.67 percent
43) Six months ago, you purchased 1,200 shares of ABC stock for $21.20 a share and have
received total dividend payments of $.60 a share. Today, you sold all your shares for $22.20 a
share. What is your total dollar return on this investment?
A) $720
B) $1,200
C) $1,440
D) $1,920
E) $3,840
44) Eight months ago, you purchased 400 shares of Winston stock at a price of $46.40 a share.
The company pays quarterly dividends of $1.05 a share. Today, you sold all your shares for
$48.30 a share. What is your total percentage return on this investment?
A) 10.12 percent
B) 4.09 percent
C) 8.62 percent
D) 12.08 percent
E) 7.34 percent
45) You bought 360 shares of stock at a total cost of $7,754.40. You received a total of $403.20
in dividends and sold your shares for $19.98 a share. What was your total rate of return?
A) 3.67 percent
B) −2.04 percent
C) −1.29 percent
D) 7.24 percent
E) 5.38 percent