In what respect is a perpetual bond similar to a no-growth common stock? Are there preferred stocks that are evaluated similarly to perpetual bonds and other preferred stocks that are more like bonds with finite lives
MCQs
1. Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee's required return? (Points: 4) 10.25% 10.50% 10.75% 11.00% 11.25%
2. Parr Paper's stock has a beta of 1.40, and its required return is 13.00%. Clover Dairy's stock has a beta of 0.80. If the risk-free rate is 4.00%, what is the required rate of return on Clover's stock? (Hint: First find the market risk premium.) (Points: 4) 8.55% 8.71% 8.99% 9.14% 9.33%
3. Suppose you hold a diversified portfolio consisting of $10,000 invested equally in each of 10 different common stocks. The portfolio's beta is 1.120. Now suppose you decided to sell one of your stocks that has a beta of 1.000 and to use the proceeds to buy a replacement stock with a beta of 1.750. What would the portfolio's new beta be? (Points: 4) 0.982 1.017 1.195 1.246 1.519
4. A mutual fund manager has a $20.0 million portfolio with a beta of 1.50. The risk-free rate is 4.50%, and the market risk premium is 5.50%. The manager expects to receive an additional $5.0 million which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 13.00%. What must the average beta of the new stocks added to the portfolio be to achieve the desired required rate of return? (Points: 4) 1.12 1.26 1.37 1.59 1.73
5. A stock is expected to pay a dividend of $1 at the end of the year. The required rate of return is rs = 11%, and the expected constant growth rate is 5%. What is the current stock price? (Points: 4) $16.67 $18.83 $20.00 $21.67 $23.33
6. A stock just paid a dividend of $1. The required rate of return is rs = 11%, and the constant growth rate is 5%. What is the current stock price? (Points: 4) $15.00 $17.50 $20.00 $22.50 $25.00
7. The Lashgari Company is expected to pay a dividend of $1 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price? (Points: 4) $15.00 $20.00 $25.00 $30.00 $35.00
8. An increase in a firm's expected growth rate would normally cause its required rate of return to (Points: 4) Increase. Decrease. Fluctuate. Remain constant. Possibly increase, decrease, or have no effect.
9. If a company's dividend is $2.12 and the price of the company's stock is $40 what is the stock's dividend yield? (Points: 4) 5.0% 5.1% 5.3% 5.6% 5.8%
10. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 7%, and if investors require a(n) 11% rate of return, what is the price of the stock? (Points: 4) $47.50 $49.00 $50.50 $52.00 $53.50
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