Reference no: EM133069554

1.) You can creat e a riskless two-stock portfolio if you have two stocks that are perfectly negatively correlated. true or false

2.) In a two-stock portfolio, the two stocks must have a correlation coefficient of zero in order to diversify some risk away. true or false

3. The difference between the market return and the risk-free rate is known as the market risk premium. true or false

4. In a well-diversified portfolio with many securities, all risk will be diversified away so that the portfolio standard deviation will be zero. true or false

5. What is the expected return on an asset that is expected to have returns of 20%, 5%, and -15% when the economy is in boom, normal, and recession states, respectively? The probabilities of boom, normal, and recession states happening are 30%, 50%, and 20%, respectively. (a) 5.50% (b) 2.00% (c) 1.83% (d) 3.33%

6. What is the standard deviation of the returns on an asset that gives returns of 20%, 5%, and -15% with the probabilities of 40%, 50%, and 10%? (Hint:  the mean return is 9%) (a) 5.71% (b) 14.34% (c) 10.68% (d) 114.00% (e) 15.42%

7. You have a two-stock portfolio. One stock has an expected return of 12% and a standard deviation of 24%. The other has an expected return of 8% and a standard deviation of 20%. You invested in these stocks equally (50% of your investment went toward each of the two stocks). If the two stocks are not perfectly positively correlated, which one of the following is the most feasible standard deviation of the portfolio? (a) 25% (b) 22% (c) 18% (d) none of these are feasible

8. KLD's most recent FCFE per share was $1.50, and the stock is selling today in the market for $51. The FCFE is expected to grow at a rate of 4% per year for the foreseeable future. If the return is 7% on investments with comparable risk, should you purchase the stock? (a) No, because the stock is overpriced $2.50. (b) Yes, because the stock is underpriced $1.00. (c) Yes, because the stock is underpriced $2.50. (d) No, because the stock is overpriced $1.00.

9. Currently, Treasury securities trade to yield 2.5%. The market offers a premium over the risk-free rate of 7%. If the beta of a stock is 1.55, what is the required rate of return of the stock? (a) 13.98% (b) 13.35% (c) 10.88% (d) 9.48%

10. Jimbo Inc. is planning to issue new bonds. The bonds will carry an 8% coupon rate (paid annually) and will have 10 years until maturity. Investors buying the bonds will pay $1,025. The investment bank helping float the issue will keep $60 per bond. Jimbo Is in the 40% tax bracket. Which of the following is closest to Jimbo's pre-tax cost of borrowing? (a) 7.82% (b) 8.00% (c) 8.32% (d) 8.53%

11. MyCron Inc. is planning to issue new bonds. The bonds will carry an 7% coupon rate (paid annually) and will have 10 years until maturity. Investors buying the bonds will pay $1,040. The investment bank helping float the issue will keep $60 per bond. MyCron Is in the 40% tax bracket. Which of the following is closest to MyCron's after-tax cost of borrowing? (a) 2.92% (b) 4.37% (c) 7.28% (d) 7.77%

12. You are seeking equity investors for your start-up firm. To get an idea of what potential equity investors require as a rate of return, you decide to use the build up method. At the direction of your CFO, you gather data on three components: 1) bond yield = 6%, 2) Equity premium = 8%, and 3) a start-up premium = 9%. Your firm has a beta of 1.2 and the risk-free rate is 3%. Using the build-up method, your estimated cost of capital is closest to: (a) 19.2% (b) 27.5% (c) 26% (d) 23%

13. The market value of Mayfield's debt is $1,200,000. The company has 200,000 shares of stock outstanding that are currently trading at a price of $10 per share. The company is financed completely with debt and equity. Which of the following is closest to the equity weight the firm should use when calculating WACC? (a) 14% (b) 63% (c) 50% (d) 37%

14. You gather the following information on Costmart's financing:

• Market value of debt = $22,500,000
• Book value of debt  = $18,000,000
• Pre-tax cost of debt = 6%
• CostMart's beta = 1.4
• Risk-free rate - 3%
• Market risk premium = 8%
• Shares outstanding = 1,000,000
• Current share price = $40
• Book value of equity = $10,000,000
• Tax rate = 40%

15. Which of the following is closest to the firm's WACC? (a) 7.42% (b) 10.4% (c) 6.83% (d) 11.25%

16. The WACC is the appropriate discount rate for all projects a firm evaluates. (true or false)

17. MakeUp Inc generated FCFF of $1450 and FCFE of $1200 in the most recent year. The firm will grow at a rate of 5% for the forseeable future. The book value and market value of MakeUp's debt are $8000 and $10,000, respectively. The firm's WACC is 9% and the firm's tax rate is 34%. Which of the following is closest to the value of the equity stake in the firm? Round your answer to the nearest $1000. (a) 38,000 (b) 36,000 (c) 30,000 (d) 26,000 (e) 28,000

18. Mekong Industries is currently selling for $90 per share. The firm's earnings last year were $5 per share. You are trying to decide whether the firm is a good choice for your portfolio. As part of your due diligence, you gather information on the P/E ratio for Mekong's three closest competitors: 1) Comp One's P/E = 19, 2) Comp Two's P/E = 21, and 3) Comp Three's P/E = 20. Using the average P/E for the competing firms, is MeKong a good buy? Why? (a) Yes, because MeKong is undervalued by $10 (b) Yes, because MeKong is overvalued by $10 (c) No, because MeKong is overvalued by $10 (d) No, because MeKong is undervalued by $10

19. With respect to Free Cash Flow valuation, which of the following is NOT correct? (a) FCFF should be discounted at the cost of equity (b) FCFF should be discounted at the WACC (c) FCFE should be discounted at the cost of equity (d) All of the above are correct

20. Krisko Industries generated FCFF of $430,000 last year. The firm is expected to grow at a rate of 15% for the next two years. After this high growth period, the firm is expected to grow at a rate of 2% for the forseeable future. The following data applies to Krisko:

• Market value of debt = $3,000,000
• Book value of debt = $2,800,000
• Pre-tax cost of debt = 6%
• Bingo's beta = 1.4
• Risk-free rate - 3%
• Market risk premium = 8%
• Shares outstanding = 500,000
• Current share price = $10
• Book value of equity = $2,000,000
• Tax rate = 40%