Posted: February 5th, 2019
Finance 20 MCQs Assignment
QUESTION 1
1. Jim Angel holds a
$200,000 portfolio consisting of the following stocks: What is the portfolio’s
beta?
Stock
Investment
Beta
A
$50,000
0.75
B
$50,000
0.80
C
$50,000
1.00
D
$50,000
1.20
Total
$200,000
0.956
1.022
0.853
1.144
0.938
In order to accurately assess the
capital structure of a firm, it is necessary to convert its balance sheet
figures from historical book values to market values. KJM Corporation’s balance
sheet (book values) as of today is as follows: The bonds have a 7.7% coupon
rate, payable semiannually, and a par value of $1,000. They mature exactly 10
years from today. The yield to maturity is 11%, so the bonds now sell below
par. What is the current market value of the firm’s debt?
Long-term
debt (bonds, at par)
$23,500,000
Preferred
stock
2,000,000
Common
stock ($10 par)
10,000,000
Retained
earnings
4,000,000
Total
debt and equity
$39,500,000
$17,734,265
$23,394,137
$18,866,239
$16,602,290
$19,054,902
QUESTION 3
1. Crockett
Corporation’s 5-year bonds yield 6.35%, and 5-year T-bonds yield 4.75%. The
real risk-free rate is r* = 2.20%, the default risk premium for Crockett’s
bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium on
Crockett’s bonds is LP = 0.90% versus zero for T-bonds, and the maturity risk
premium for all bonds is found with the formula MRP = (t – 1) 0.1%, where t =
number of years to maturity. What inflation premium (IP) is built into 5-year
bond yields?
2.02%
2.49%
2.43%
2.11%
2.15%
Koy Corporation’s 5-year bonds yield
9.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%,
the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for
Koy’s bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk
premium for all bonds is found with the formula MRP = (t – 1) 0.1%, where t =
number of years to maturity. What is the default risk premium (DRP) on Koy’s
bonds?
2.36%
3.10%
2.64%
2.70%
3.69%
QUESTION 5
1. Kristina Raattama
holds a $200,000 portfolio consisting of the following stocks. The portfolio’s
beta is 0.875. If Kristina replaces Stock A with another stock, E, which has a
beta of 1.50, what will the portfolio’s new beta be?
Stock
Investment
Beta
A
$50,000
0.50
B
50,000
0.80
C
50,000
1.00
D
50,000
1.20
Total
$200,000
1.07
1.13
1.18
1.24
1.30
QUESTION 6
1. Nagel Equipment has
a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The
T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the
stock market during the past 4 years was 10.25%. Investors expect the average
annual future return on the market to be 14.50%. Using the SML, what is the
firm’s required rate of return?
10.85%
15.53%
13.39%
10.31%
14.86%
QUESTION 7
1. Mulherin’s 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.)
10.36%
10.62%
10.88%
11.15%
11.43%
QUESTION 8
1.
Kay Corporation’s 5-year bonds yield 6.20% and 5-year T-bonds
yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for
5-year bonds is IP = 1.50%, the default risk premium for Kay’s bonds is DRP =
1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is
found with the formula MRP = (t – 1) 0.1%, where t = number of years to
maturity. What is the liquidity premium (LP) on Kay’s bonds?
0.52%
0.61%
0.38%
0.50%
0.56%
5 points
QUESTION 9
1.
Jim Angel holds a $200,000 portfolio consisting of the following
stocks: What is the portfolio’s beta?
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
0.988
1.215
1.155
1.234
1.225
5 points
QUESTION 10
1.
Grossnickle Corporation issued 20-year, noncallable, 8.1% annual
coupon bonds at their par value of $1,000 one year ago. Today, the market
interest rate on these bonds is 5.5%. What is the current price of the bonds,
given that they now have 19 years to maturity?
$1,132.57
$1,223.69
$1,301.80
$1,353.87
$1,314.82
QUESTION 11
1.
Nagel Equipment has a beta of 0.88 and an expected dividend
growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is
5.25%. The annual return on the stock market during the past 4 years was
10.25%. Investors expect the average annual future return on the market to be
13.25%. Using the SML, what is the firm’s required rate of return?
10.20%
13.03%
14.50%
12.29%
11.18%
5 points
QUESTION 12
1.
A 25-year, $1,000 par value bond has an 8.5% annual payment
coupon. The bond currently sells for $900. If the yield to maturity remains at
its current rate, what will the price be 5 years from now?
$1,069.75
$698.06
$1,096.95
$906.57
$688.99
5 points
QUESTION 13
1.
Kollo Enterprises has a beta of 0.82, the real risk-free rate is
2.00%, investors expect a 3.00% future inflation rate, and the market risk
premium is 4.70%. What is Kollo’s required rate of return?
6.73%
6.64%
9.30%
9.56%
8.85%
QUESTION 14
1.
Consider the following information and then calculate the
required rate of return for the Global Investment Fund, which holds 4 stocks.
The market’s required rate of return is 9.50%, 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
8.91%
10.06%
6.77%
8.64%
10.42%
5 points
QUESTION 15
1.
Schnusenberg Corporation just paid a dividend of D = $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 0.85, 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?
$22.16
$26.54
$25.77
$29.37
$27.83
5 points
QUESTION 16
1.
Kelly Inc’s 5-year bonds yield 7.50% and 5-year T-bonds yield
4.50%. The real risk-free rate is r* = 2.5%, the default risk premium for
Kelly’s bonds is DRP = 0.40%, the liquidity premium on Kelly’s bonds is LP =
2.6% versus zero on T-bonds, and the inflation premium (IP) is 1.5%. What is
the maturity risk premium (MRP) on all 5-year bonds?
0.38%
0.50%
0.40%
0.59%
0.56%
5 points
QUESTION 17
1.
You hold a diversified $100,000 portfolio consisting of 20
stocks with $5,000 invested in each. The portfolio’s beta is 1.12. You plan 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?
1.286
1.255
1.224
1.194
1.165
QUESTION 18
1.
You hold a diversified $100,000 portfolio consisting of 20
stocks with $5,000 invested in each. The portfolio’s beta is 1.12. You plan to
sell a stock with b = 0.90 and use the proceeds to buy a new stock with b =
2.50. What will the portfolio’s new beta be?
1.20
1.152
1.308
0.912
1.008
5 points
QUESTION 19
1.
The Francis Company is expected to pay a dividend of D = $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 1.45, the
market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the
company’s current stock price?
$20.92
$22.18
$19.87
$18.20
$21.34
5 points
QUESTION 20
1.
Grossnickle Corporation issued 20-year, noncallable, 6.3% annual
coupon bonds at their par value of $1,000 one year ago. Today, the market
interest rate on these bonds is 5.5%. What is the current price of the bonds,
given that they now have 19 years to maturity?
$1,136.58
$950.79
$1,289.58
$1,049.15
$1,092.86
