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Chapter 29: Basic Financial Tools: A review
POINTS:
1
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Page 153
240. Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or weak,
and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of
the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.)
Economic
Conditions
Prob.
Return
Strong
30%
32.0%
Normal
40%
10.0%
Weak
30%
−16.0%
a.
17.69%
b.
18.62%
c.
19.55%
d.
20.52%
e.
21.55%
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241. The $10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return. The risk-free rate is
4.20%. Henry now receives another $5.00 million, which he invests in stocks with an average beta of 0.65. What is the
required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new
portfolio beta.)
Chapter 29: Basic Financial Tools: A review
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a.
8.83%
b.
9.05%
c.
9.27%
d.
9.51%
e.
9.74%
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1
242. Hazel Morrison, a mutual fund manager, has a $40 million portfolio with a beta of 1.00. The risk-free rate is 4.25%,
and the market risk premium is 6.00%. Hazel expects to receive an additional $60 million, which she plans to invest in
additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 13.00%.
What must the average beta of the new stocks be to achieve the target required rate of return?
a.
1.68
b.
1.76
c.
1.85
Chapter 29: Basic Financial Tools: A review
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Page 155
d.
1.94
e.
2.04
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243. Joel Foster is the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The
required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect
(and require) on this fund?
Stock
Amount
Beta
A
$1,075,000
1.20
B
675,000
0.50
C
750,000
1.40
D
500,000
0.75
$3,000,000
a.
10.56%
b.
10.83%
c.
11.11%
d.
11.38%
e.
11.67%
Chapter 29: Basic Financial Tools: A review
POINTS:
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244. DHF Company has a beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00%
versus a required return on an average stock of 10.00%. Now the required return on an average stock increases by 30.0%
(not percentage points). Neither betas nor the risk-free rate change. What would DHF's new required return be?
a.
14.89%
b.
15.68%
c.
16.50%
d.
17.33%
e.
18.19%
ANSWER:
c
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245. McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth
rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the
market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
a.
$26.77
b.
$27.89
c.
$29.05
d.
$30.21
e.
$31.42
Chapter 29: Basic Financial Tools: A review
POINTS:
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246. Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2
years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best
estimate of the current stock price?
a.
$41.58
b.
$42.64
c.
$43.71
d.
$44.80
e.
$45.92
POINTS:
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247. The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at
1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is
12.0%. What is the best estimate of the current stock price?
a.
$37.05
b.
$38.16
c.
$39.30
d.
$40.48
e.
$41.70
POINTS:
1
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248. The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 15% for 3
years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is
its current stock price?
a.
$30.57
b.
$31.52
c.
$32.49
d.
$33.50
e.
$34.50
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249. Sawchuck Consulting has been profitable for the last 5 years, but it has never paid a dividend. Management has
indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years,
and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along
with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the
stock's current value?
Year
0
1
2
3
4
5
6
Growth rate
NA
NA
NA
NA
50.00%
25.00%
8.00%
Dividends
$0.000
$0.000
$0.000
$0.250
$0.375
$0.469
$0.506
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a.
$9.94
b.
$10.19
c.
$10.45
d.
$10.72
e.
$10.99
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