FIN 301 Prof. Thistle Principals of Managerial Finance Fall 2017 EXAM 2 VERSION C PUT YOUR NAME, SECTION NUMBER AND TEST VERSION ON THE SANTRON FORM MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following features allows a borrower to redeem or repurchase a bond issue before its maturity date? A) floating rate B) the priority of claims C) convertibility D) the call provision 2) If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2,000 1.5 Stock B $5,000 1.2 Stock C $3,000.8 What is the beta of the portfolio? 2) A) 1.14 B) 1.17 C) 1.32 D) Canʹt be determined from information given 3) The interest on corporate bonds is typically paid 3) A) annually. B) semiannually. C) quarterly. D) monthly. 4) Butler, Inc.ʹs return on equity is 17% and management retains 75% of earnings for investment purposes. Based on this information, what will be the firmʹs growth rate? 4) A) 22.67% B) 4.25% C) 12.75% D) 44.12% 5) Your portfolio consists of $3,000 in ABC stock, $4,500 of DEF stock and $2,500 of GHI stock. Expected rates of return are ABC 5%, DEF 12%, and GHI 16%. What is the portfolio expected rate of return? 5) A) 12.0% B) 16.0% C) 11.4% D) 10.9% 6) What is the yield to maturity of a nine year bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,407? Assume annual coupon payments. 6) A) 11.43% B) 21.81% C) 6.14% D) 12.28% 1
7) Siebling Manufacturing Companyʹs common stock has a beta of.8. If the expected risk free return is 2% and the market offers a premium of 8% over the risk free rate, what is the expected return on Sieblingʹs common stock? 7) A) 14.4% B) 13.4% C) 8.4% D) 7.8% 8) Madison was hired to design and decorate the offices of a large pharmaceutical company. She accidentally read a report indicating that a new drug had just been approved by the Food and Drug administration. She immediately bought the companyʹs stock which doubled in price over the following week. This outcome is inconsistent with 8) A) the strong form efficient market hypothesis. Her action was probably illegal. B) the weak form efficient market hypothesis. C) the semi strong form efficient market hypothesis. D) all of the above. 9) Which of the following is consistent with the semi strong form efficient market hypothesis? 9) A) a company announces higher than expected sales and earnings. The stock price immediately increases by 10%. B) so called value stocks outperform growth stocks. C) stocks that have performed well over the past year continue to perform well for several more months. D) a company announces higher than expected sales and earnings. The stock price remains unchanged. 10) Which of the following has a beta of 1? 10) A) The 10 year T Bond B) The market C) The 1 year T Bill D) The Dow Jones Industrial Average 11) The Blackburn Group has recently issued 20 year, unsecured bonds rated BB by Moodyʹs. These bonds yield 443 basis points above the U.S. Treasury yield of 2.76%. The yield to maturity on these bonds is 11) A) 12.23% B) mortgage bonds. C) 4.43%. D) 7.19% 12) The GAPʹs most recent earnings per share were $1.75. Analysts forecast next yearʹs earnings per share at $1.88. If the appropriate P/E ratio is 15, a share of GAP stock should be valued at 12) A) $28.20. B) $26.25. C) $8.57. D) $27.23. 13) The expected return on VZ next year is 12% with a standard deviation of 20%. The expected return on ANT next year is 24% with a standard deviation of 30%. The correlation between the two stocks is.6. If Emily makes equal investments in VZ and ANT, what is the standard deviation of her portfolio? 13) A) 5.05% B) 25.00% C) 22.47% D) 15.00% 14) Which of the following best measures an assetʹs risk? 14) A) The standard deviation B) Expected return C) The probability distribution D) The cash return 2
15) You purchased the stock of Sargent Motors at a price of $75.75 one year ago today. If you sell the stock today for $89.00, what is your rate of return? 15) A) 12.50% B) 17.50% C) 25.00% D) 35.00% 16) A decrease in the will cause an increase in common stock value. 16) A) growth rate B) required rate of return C) last paid dividend D) both B and C 17) If current market interest rates rise, what will happen to the value of outstanding bonds? 17) A) It will fall. B) It will remain unchanged. C) It will rise. D) There is no connection between current market interest rates and the value of outstanding bonds. 18) Given the capital asset pricing model, a security with a beta of 1.5 should return, if the risk free rate is 3% and the market return is 11%. 18) A) 15.0% B) 14.5% C) 16.5% D) 14.0% 19) You are considering buying some stock in Continental Grain. Which of the following is an example of nondiversifiable risk? 19) A) Risk resulting from a general decline in the stock market B) Risk resulting from an impending lawsuit against Continental C) Risk resulting from an explosion in a grain elevator owned by Continental D) Risk resulting from a news release that several of Continentalʹs grain silos were tainted 20) If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return? 20) A) 15% B) 13% C) 12% D) 14% 21) Marcus Berger invested $9842.33 in Hawkeye Hats, Inc. four years ago. He sold the stock today for $11,396.22. What is his geometric average return? 21) A) 2.98% B) 3.95% C) 3.73% D) There is insufficient information to derive an answer. 22) The appropriate measure for risk according to the capital asset pricing model is 22) A) the standard deviation of a firmʹs cash flows. B) beta. C) alpha. D) probability of correlation. 3
23) Green Companyʹs common stock is currently selling at $24.00 per share. The company recently paid dividends of $1.92 per share and projects growth at a rate of 4%. At this rate, what is the stockʹs expected rate of return? 23) A) 4.08% B) 8.80% C) 8.00% D) 12.00% 24) Colby & Company bonds pay semiannual interest of $50. They mature in 15 years and have a par value of $1,000. The market rate of interest is 8%. The market value of Colby bonds is (round to the nearest dollar) 24) A) $1,000. B) $743. C) $1,173. D) $827. 25) P. Noel Companyʹs common stock has just paid a $2.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock? 25) A) $22.22 B) $15.00 C) $23.33 D) $40.00 26) When a company has an initial public offering 26) A) the previous owner of the shares will bet the money and the buyer will get the shares. B) the proceeds of the sale will increase the companyʹs equity. C) the proceeds of the sale will become a liability payable to the shareholders. D) the proceeds of the sale will not affect the companyʹs balance. 27) A $1,000 par value bonds has a 12% coupon rate (paid annually). It has 10 years remaining to maturity. If bonds of similar risk and maturity currently yield 8%, what should this bond s price be? A) $1,000 B) $805.20 C) $851.50 D)$1,268.40 28) Which of the following statements is most correct? A) Investors are able to eliminate virtually all market risk if they hold a large diversified portfolio of stocks. B) Investors are able to eliminate virtually all company specific (unique or diversifiable) risk if they hold a large diversified portfolio of stocks. C) Holding a large diversified portfolio of stocks will not impact investors risk D) Holding a large portfolio of similar stocks from the same industry will reduce risk more than a diversified portfolio of stocks. 29) Which of the following causes common stock prices to increase? A) A lower required rate of return. B) A lower dividend growth rate. C) A higher required rate of return. D) A smaller current dividend 30) Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? A) A reduction in market interest rates. B) The company s bonds are downgraded. C) An increase in the default risk premium. D) An increase in the inflation rate 4
1) D 2) A 3) B 4) C 5) D 6) D 7) C 8) A 9) A 10) B 11) D 12) A 13) C 14) A 15) B 16) B 17) A 18) A 19) A 20) B 21) C 22) B 23) D 24) C 25) C 26) B 27) D 28) B 29) A 30) A 5