Finance Chapter 29 New Beta New Stocks Req Oldtotal Old Bnewtotal Points Difficulty Difficulty Challenging

Chapter 29: Basic Financial Tools: A review

QUESTION TYPE:

LOCAL STANDARDS:

TOPICS:

OTHER:

POINTS:

1

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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%

b

POINTS:

1

DIFFICULTY:

Difficulty: Challenging

HAS VARIABLES:

False

and Management Science

LOCAL STANDARDS:

United States – OH – Default City – TBA

KEYWORDS:

Bloom’s: Knowledge

OTHER:

TYPE: Multiple Choice: Problem

DATE MODIFIED:

1/10/2018 11:43 AM

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.)

DATE CREATED:

10/30/2017 8:23 PM

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%

ANSWER:

POINTS:

1

Difficulty: Challenging

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

IFMG.DAVE.19.29.03 – LO: 29-3

and Management Science

STATE STANDARDS:

United States – TN – DISC: Risk and return

United States – OH – Default City – TBA

TOPICS:

Portfolio beta

KEYWORDS:

Bloom’s: Application

DATE CREATED:

10/30/2017 8:23 PM

1/10/2018 11:43 AM

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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d.

1.94

e.

2.04

ANSWER:

b

POINTS:

1

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

STATE STANDARDS:

United States – TN – DISC: Risk and return

LOCAL STANDARDS:

United States – OH – Default City – TBA

KEYWORDS:

Bloom’s: Application

DATE CREATED:

10/30/2017 8:23 PM

DATE MODIFIED:

1/10/2018 11:43 AM

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:

1

Difficulty: Challenging

QUESTION TYPE:

False

IFMG.DAVE.19.29.03 – LO: 29-3

STATE STANDARDS:

United States – OH – Default City – TBA

TOPICS:

Bloom’s: Application

TYPE: Multiple Choice: Problem

DATE CREATED:

1/10/2018 11:43 AM

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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POINTS:

1

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

STATE STANDARDS:

United States – TN – DISC: Risk and return

LOCAL STANDARDS:

United States – OH – Default City – TBA

KEYWORDS:

Bloom’s: Application

DATE CREATED:

10/30/2017 8:23 PM

DATE MODIFIED:

1/10/2018 11:43 AM

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

DIFFICULTY:

Difficulty: Challenging

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

POINTS:

1

DIFFICULTY:

Difficulty: Challenging

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

IFMG.DAVE.19.29.04 – LO: 29-4

STATE STANDARDS:

United States – TN – DISC: Stocks and bonds

LOCAL STANDARDS:

United States – OH – Default City – TBA

TOPICS:

Nonconstant growth valuation

KEYWORDS:

Bloom’s: Application

OTHER:

TYPE: Multiple Choice: Problem

DATE CREATED:

10/30/2017 8:23 PM

DATE MODIFIED:

1/10/2018 11:43 AM

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

ANSWER:

b

POINTS:

1

Difficulty: Challenging

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

IFMG.DAVE.19.29.04 – LO: 29-4

and Management Science

STATE STANDARDS:

United States – TN – DISC: Stocks and bonds

United States – OH – Default City – TBA

TOPICS:

Nonconstant growth valuation

KEYWORDS:

Bloom’s: Application

DATE CREATED:

10/30/2017 8:23 PM

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

ANSWER:

POINTS:

1

LEARNING OBJECTIVES:

IFMG.DAVE.19.29.04 – LO: 29-4

STATE STANDARDS:

United States – TN – DISC: Stocks and bonds

United States – OH – Default City – TBA

TOPICS:

Nonconstant growth valuation

Bloom’s: Application

OTHER:

TYPE: Multiple Choice: Problem

DATE CREATED:

10/30/2017 8:23 PM

1/10/2018 11:43 AM

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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

ANSWER:

d

POINTS:

1

Difficulty: Challenging

QUESTION TYPE:

False

LEARNING OBJECTIVES:

and Management Science

STATE STANDARDS:

United States – OH – Default City – TBA

TOPICS:

KEYWORDS:

TYPE: Multiple Choice: Problem

1/10/2018 11:43 AM

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

50.00%

25.00%

8.00%

Dividends

$0.000

$0.250

$0.375

$0.469

$0.506

DATE MODIFIED:

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a.

$9.94

b.

$10.19

c.

$10.45

d.

$10.72

e.

$10.99

ANSWER:

d

POINTS:

1

Difficulty: Challenging

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

IFMG.DAVE.19.29.04 – LO: 29-4

and Management Science

STATE STANDARDS:

United States – TN – DISC: Stocks and bonds

LOCAL STANDARDS:

United States – OH – Default City – TBA

Nonconstant growth valuation

KEYWORDS:

Bloom’s: Application

TYPE: Multiple Choice: Problem

DATE CREATED:

10/30/2017 8:23 PM

DATE MODIFIED:

1/10/2018 11:43 AM