Finance Chapter 29 Choice Conceptual Notes Students May Able Correctly Determine The Answer This Question

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Chapter 29: Basic Financial Tools: A review
c.
The company's expected capital gains yield is 5%.
d.
The company's expected stock price at the beginning of next year is $9.50.
e.
The company's current stock price is $20.
ANSWER:
d
113. If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is
CORRECT? The stock is in equilibrium.
a.
The stock's dividend yield is 5%.
b.
The price of the stock is expected to decline in the future.
c.
The stock's required return must be equal to or less than 5%.
d.
The stock's price one year from now is expected to be 5% above the current price.
e.
The expected return on the stock is 5% a year.
ANSWER:
d
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114. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium,
which of the following statements is CORRECT?
A
B
10%
12%
$25
$40
7%
9%
a.
These two stocks must have the same dividend yield.
b.
These two stocks should have the same expected return.
c.
These two stocks must have the same expected capital gains yield.
d.
These two stocks must have the same expected year-end dividend.
e.
These two stocks should have the same price.
ANSWER:
a
115. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium,
which of the following statements is CORRECT?
A
B
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$25
$40
7%
9%
10%
12%
a.
The two stocks could not be in equilibrium with the numbers given in the question.
b.
A's expected dividend is $0.50.
c.
B's expected dividend is $0.75.
d.
A's expected dividend is $0.75 and B's expected dividend is $1.20.
e.
The two stocks should have the same expected dividend.
ANSWER:
d
116. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium,
which of the following statements is CORRECT?
A
B
$25
$25
10%
5%
15%
15%
a.
Stock A has a higher dividend yield than Stock B.
b.
Currently the two stocks have the same price, but over time Stock B's price will pass that of A.
c.
Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high
as Stock B's.
d.
The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.
e.
Stock A's expected dividend at t = 1 is only half that of Stock B.
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Chapter 29: Basic Financial Tools: A review
ANSWER:
e
117. Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium,
which of the following statements is CORRECT?
X
Y
$30
$30
6%
4%
12%
10%
a.
Stock Y has a higher dividend yield than Stock X.
b.
One year from now, Stock X's price is expected to be higher than Stock Y's price.
c.
Stock X has the higher expected year-end dividend.
d.
Stock Y has a higher capital gains yield.
e.
Stock X has a higher dividend yield than Stock Y.
ANSWER:
b
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118. Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the
following statements is CORRECT?
Expected dividend, D1
$3.00
Current Price, P0
$50
Expected constant growth rate
6.0%
a.
The stock's expected dividend yield and growth rate are equal.
b.
The stock's expected dividend yield is 5%.
c.
The stock's expected capital gains yield is 5%.
d.
The stock's expected price 10 years from now is $100.00.
e.
The stock's required return is 10%.
POINTS:
1
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119. Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium,
which of the following statements is CORRECT?
X
Y
$25
$25
5%
3%
12%
10%
a.
Stock X pays a higher dividend per share than Stock Y.
b.
One year from now, Stock X should have the higher price.
c.
Stock Y has a lower expected growth rate than Stock X.
d.
Stock Y has the higher expected capital gains yield.
e.
Stock Y pays a higher dividend per share than Stock X.
ANSWER:
a
120. Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate
of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?
a.
The stock's dividend yield is 8%.
b.
The current dividend per share is $4.00.
c.
The stock price is expected to be $54 a share one year from now.
d.
The stock price is expected to be $57 a share one year from now.
e.
The stock's dividend yield is 7%.
ANSWER:
c
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121. Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which
of the following statements is CORRECT?
a.
Stock B must have a higher dividend yield than Stock A.
b.
Stock A must have a higher dividend yield than Stock B.
c.
If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock
B's.
d.
Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.
e.
If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock
B's.
ANSWER:
e
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122. Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return.
Which of the following statements is CORRECT?
a.
If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
b.
If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
c.
The two stocks must have the same dividend growth rate.
d.
The two stocks must have the same dividend yield.
e.
The two stocks must have the same dividend per share.
ANSWER:
a
123. Which of the following statements is CORRECT, assuming stocks are in equilibrium?
a.
Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of
5%, its expected dividend yield is 5% as well.
b.
A stock's dividend yield can never exceed its expected growth rate.
c.
A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds
its required rate of return.
d.
Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.
e.
The dividend yield on a constant growth stock must equal its expected total return minus its expected capital
gains yield.
ANSWER:
e
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124. Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming
the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
A
B
1.10
0.90
7.00%
7.00%
a.
Stock A must have a higher dividend yield than Stock B.
b.
Stock B's dividend yield equals its expected dividend growth rate.
c.
Stock B must have the higher required return.
d.
Stock B could have the higher expected return.
e.
Stock A must have a higher stock price than Stock B.
POINTS:
1
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125. Which of the following statements is CORRECT?
a.
If CF0 is positive and all the other CFs are negative, then you cannot solve for I.
b.
If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I
causes the PV of the cash flows to equal the cash flow at Time 0.
c.
If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve
for I, but only if the sum of the undiscounted cash flows exceeds the cost.
d.
To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute
value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a
computer or financial calculator but quite difficult otherwise.
e.
If you solve for I and get a negative number, then you must have made a mistake.
ANSWER:
d
126. Which of the following bank accounts has the highest effective annual return?
a.
An account that pays 8% nominal interest with daily (365-day) compounding.
b.
An account that pays 8% nominal interest with monthly compounding.
c.
An account that pays 8% nominal interest with annual compounding.
d.
An account that pays 7% nominal interest with daily (365-day) compounding.
e.
An account that pays 7% nominal interest with monthly compounding.
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Chapter 29: Basic Financial Tools: A review
ANSWER:
a
127. You plan to invest some money in a bank account. Which of the following banks provides you with the highest
effective rate of interest?
a.
Bank 1; 6.1% with annual compounding.
b.
Bank 2; 6.0% with monthly compounding.
c.
Bank 3; 6.0% with annual compounding.
d.
Bank 4; 6.0% with quarterly compounding.
e.
Bank 5; 6.0% with daily (365-day) compounding.
ANSWER:
e
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128. Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that
has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is
CORRECT?
a.
The required return on the market is 10%.
b.
The portfolio's required return is less than 11%.
c.
If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's
required return will increase by more than 2%.
d.
If the market risk premium remains unchanged but expected inflation increases by 2%, Gretta's portfolio's
required return will increase by more than 2%.
e.
If the stock market is efficient, Gretta's portfolio's expected return should equal the expected return on the
market, which is 11%.
POINTS:
1
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129. Assume that the market is in equilibrium and that Portfolio AB has 50% invested in Stock A and 50% invested in
Stock B. Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 13%
and a standard deviation of 30%. The risk-free rate is 5% and the market risk premium, rM rRF, is 6%. The returns of
Stock A and Stock B are independent of one another, i.e., the correlation coefficient between them is zero. Which of the
following statements is CORRECT?
a.
Since the two stocks have zero correlation, Portfolio AB is riskless.
b.
Stock B's beta is 1.0000.
c.
Portfolio AB's required return is 11%.
d.
Portfolio AB's standard deviation is 25%.
e.
Stock A's beta is 0.8333.
ANSWER:
e
130. Portfolio AB was created by investing in a combination of Stocks A and B. Stock A has a beta of 1.2 and a standard
deviation of 25%. Stock B has a beta of 1.4 and a standard deviation of 20%. Portfolio AB has a beta of 1.25 and a
standard deviation of 18%. Which of the following statements is CORRECT?
a.
Stock A has more market risk than Stock B but less stand-alone risk.
b.
Portfolio AB has more money invested in Stock A than in Stock B.
c.
Portfolio AB has the same amount of money invested in each of the two stocks.
d.
Portfolio AB has more money invested in Stock B than in Stock A.
e.
Stock A has more market risk than Portfolio AB.
ANSWER:
b
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131. Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual
compounding?
a.
$205.83
b.
$216.67
c.
$228.07
d.
$240.08
e.
$252.08
ANSWER:
d
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132. JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5%
interest, compounded annually. How much will you have when the CD matures?
a.
$1,781.53
b.
$1,870.61
c.
$1,964.14
d.
$2,062.34
e.
$2,165.46
ANSWER:
a
133. Cyberhost Corporation's sales were $225 million last year. If sales grow at 6% per year, how large (in millions) will
they be 5 years later?
a.
$271.74
b.
$286.05
c.
$301.10
d.
$316.16
e.
$331.96
ANSWER:
c
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134. How much would $1, growing at 3.5% per year, be worth after 75 years?
a.
$12.54
b.
$13.20
c.
$13.86
d.
$14.55
e.
$15.28
ANSWER:
b
135. Your bank offers a savings account that pays 3.5% interest, compounded annually. If you invest $1,000 in the
account, then how much will it be worth at the end of 25 years?
a.
$2,245.08
b.
$2,363.24
c.
$2,481.41
d.
$2,605.48
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Chapter 29: Basic Financial Tools: A review
e.
$2,735.75
ANSWER:
b
136. Suppose a State of New Mexico bond will pay $1,000 eight years from now. If the going interest rate on these 8-year
bonds is 5.5%, how much is the bond worth today?
a.
$651.60
b.
$684.18
c.
$718.39
d.
$754.31
e.
$792.02
ANSWER:
a
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137. You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?
a.
$1,067.95
b.
$1,124.16
c.
$1,183.33
d.
$1,245.61
e.
$1,311.17
ANSWER:
e
138. Suppose a Google.com bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is
4.25%, how much is the bond worth today?
a.
$2,819.52
b.
$2,967.92
c.
$3,116.31
d.
$3,272.13
e.
$3,435.74
ANSWER:
b
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139. You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years
from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond?
a.
3.82%
b.
4.25%
c.
4.72%
d.
5.24%
e.
5.77%
ANSWER:
d
140. Wildwoods, Inc. earned $1.50 per share five years ago. Its earnings this year were $3.20. What was the growth rate
in earnings per share (EPS) over the 5-year period?
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a.
15.54%
b.
16.36%
c.
17.18%
d.
18.04%
e.
18.94%
ANSWER:
b
141. You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from
today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make
the 3rd deposit, 3 years from now?
a.
$11,973
b.
$12,603
c.
$13,267
d.
$13,930
e.
$14,626
ANSWER:
c

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