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Chapter 29: Basic Financial Tools: A review
Long-term debt (bonds, at par)
$10,000,000
Preferred stock
2,000,000
Common stock ($10 par)
10,000,000
Retained earnings
4,000,000
Total debt and equity
$26,000,000
The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from
today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?
a.
$5,276,731
b.
$5,412,032
c.
$5,547,332
d.
$7,706,000
e.
$7,898,650
POINTS:
1
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Page 122
203. Macintosh Lumber believes the following probability distribution exists for its stock. What is the coefficient of
variation on the company's stock?
Probability
Stock's
State of
of State
Expected
the Economy
Occurring
Return
Boom
0.45
25%
Normal
0.50
15%
Recession
0.05
5%
a.
0.2839
b.
0.3069
c.
0.3299
d.
0.3547
e.
0.3813
POINTS:
1
204. Martin Ortner holds a $200,000 portfolio consisting of the following stocks:
Chapter 29: Basic Financial Tools: A review
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Page 123
Stock
Investment
Beta
A
$ 50,000
0.95
B
50,000
0.80
C
50,000
1.00
D
50,000
1.20
Total
$200,000
What is the portfolio's beta?
a.
0.938
b.
0.988
c.
1.037
d.
1.089
e.
1.143
ANSWER:
b
205. Megan Ross holds the following portfolio:
Stock
Investment
Beta
A
$150,000
1.40
B
50,000
0.80
C
100,000
1.00
D
75,000
1.20
Total
$375,000
What is the portfolio's beta?
a.
1.06
b.
1.17
c.
1.29
Chapter 29: Basic Financial Tools: A review
d.
1.42
e.
1.56
ANSWER:
b
206. Paul McLaren holds the following portfolio:
Stock
Investment
Beta
A
$150,000
1.40
B
50,000
0.80
C
100,000
1.00
D
75,000
1.20
Total
$375,000
Paul plans to sell Stock A and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta
change?
a.
−0.190
b.
−0.211
c.
−0.234
d.
−0.260
e.
−0.286
ANSWER:
d
207. Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta
is 1.12. Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80. What will the
portfolio's new beta be?
a.
1.286
b.
1.255
c.
1.224
d.
1.194
e.
1.165
ANSWER:
e
208. Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%,
and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the
market risk premium, then find the required returns on the stocks.)
a.
2.75%
b.
2.89%
c.
3.05%
d.
3.21%
e.
3.38%
POINTS:
1
209. Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the
stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%.
Based on the SML, what is the firm's required return?
a.
13.51%
b.
13.86%
c.
14.21%
d.
14.58%
e.
14.95%
ANSWER:
e
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POINTS:
1
210. Consider the following information and then calculate the required rate of return for the Universal Investment Fund,
which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are
as follows:
Stock
Investment
Beta
A
$ 200,000
1.50
B
$ 300,000
−0.50
C
$ 500,000
1.25
D
$1,000,000
0.75
a.
9.58%
b.
10.09%
c.
10.62%
d.
11.18%
e.
11.77%
Chapter 29: Basic Financial Tools: A review
POINTS:
1
211. Data for Atwill Corporation is shown below. Now Atwill acquires some risky assets that cause its beta to increase by
30%. In addition, expected inflation increases by 2.00%. What is the stock's new required rate of return?
Initial beta
1.00
Initial required return (rs)
10.20%
Market risk premium, RPM
6.00%
Percentage increase in beta
30.00%
Increase in inflation premium, IP
2.00%
a.
14.00%
b.
14.70%
c.
15.44%
d.
16.21%
e.
17.02%
POINTS:
1
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212. Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What
is the required rate of return on the market? (Hint: First find the market risk premium.)
a.
10.36%
b.
10.62%
c.
10.88%
d.
11.15%
e.
11.43%
POINTS:
1
213. Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is
expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is
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Page 130
5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price?
a.
$28.90
b.
$29.62
c.
$30.36
d.
$31.12
e.
$31.90
POINTS:
1
214. The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant
rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate
is 4.00%. What is Jameson's current stock price, P0?
a.
$18.62
b.
$19.08
c.
$19.56
d.
$20.05
e.
$20.55
Chapter 29: Basic Financial Tools: A review
POINTS:
1
215. National Advertising just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant
rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-
free rate is 4.50%. What is the company's current stock price?
a.
$14.52
b.
$14.89
c.
$15.26
d.
$15.64
e.
$16.03
POINTS:
1
216. Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend
is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?
a.
$0.95
b.
$1.05
c.
$1.16
d.
$1.27
e.
$1.40
ANSWER:
b
217. Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend
is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?
a.
$2.20
b.
$2.44
c.
$2.69
d.
$2.96
e.
$3.25
ANSWER:
b
218. Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is
6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i.e.,
what is ?
a.
$37.52
b.
$39.40
c.
$41.37
d.
$43.44
e.
$45.61
POINTS:
1
219. Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal
(not effective) annual rate of return?
a.
8.03%
b.
8.24%
c.
8.45%
d.
8.67%
e.
8.89%
ANSWER:
e
220. Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its
effective annual (not nominal) rate of return?
a.
6.62%
b.
6.82%
c.
7.03%
d.
7.25%
e.
7.47%
ANSWER:
e
Eff % required return = (1 + (Qt Div/P))N − 1 =
7.47%
POINTS:
1
221. Your Green Investment Tips subscription is about to expire. You plan to subscribe to the magazine for the rest of
your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for
$850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will
remain constant, how many years must you live to make the lifetime subscription the better buy?
a.
7.48
b.
8.80
c.
10.35
d.
12.18
e.
14.33
ANSWER:
e
222. You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you
also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8
quarters) from now, how much will be in the account three years (12 quarters) from now?
a.
$15,234.08
b.
$16,035.88
c.
$16,837.67
d.
$17,679.55
e.
$18,563.53
ANSWER:
b
223. Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. An
offer to lend you the $50,000 also comes from Community Bank, but it will charge 6.0%, simple interest, with interest
paid at the end of the year. What's the difference in the effective annual rates charged by the two banks?
a.
1.56%
b.
1.30%
c.
1.09%
d.
0.91%
e.
0.72%
ANSWER:
d
224. Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the
next 5 years. By how much would you reduce the amount you owe in the first year?
a.
$2,404.91
b.
$2,531.49
c.
$2,658.06
d.
$2,790.96
e.
$2,930.51
ANSWER:
b
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225. Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the
next 5 years. How much would you still owe at the end of the first year, after you have made the first payment?
a.
$10,155.68
b.
$10,690.19
c.
$11,252.83
d.
$11,845.09
e.
$12,468.51
ANSWER:
e
226. Your older brother turned 35 today, and he is planning to save $7,000 per year for retirement, with the first deposit to
be made one year from today. He will invest in a mutual fund that's expected to provide a return of 7.5% per year. He
plans to retire 30 years from today, when he turns 65, and he expects to live for 25 years after retirement, to age 90. Under
these assumptions, how much can he spend each year after he retires? His first withdrawal will be made at the end of his
first retirement year.
a.
$58,601
b.
$61,686
c.
$64,932
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Page 139
d.
$68,179
e.
$71,588
ANSWER:
c
227. Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is
9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon
interest rate?
a.
6.27%
b.
6.60%
c.
6.95%
d.
7.32%
e.
7.70%
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POINTS:
1
228. A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to
maturity remains at its current rate, what will the price be 5 years from now?
a.
$839.31
b.
$860.83
c.
$882.90
d.
$904.97
e.
$927.60
ANSWER:
c
