FIN 301
Practice Questions for Midterm 4
1. Wayward Inc. has a beta of 1.42.
The expected return on the S&P 500 index for the next year is
11.87% and a oneyear Tbill that pays $1,000 at maturity is currently selling for $945 (there are
no
coupon interest payments).
What is the expected return for Wayward Inc. in the coming year?
a)
8.59%
b) 14.55%
c) 11.87%
d) 14.41%
e) 11.03%
2. Anthony’s Anchovies, Inc. sold a 20year bond issue two years ago.
The bond has a 5.35%
annual
coupon and a $1,000 face value.
If the current market price of the bond is $751.64 and the tax rate is
34%, what is the aftertax cost of debt?
a) 4.20%
b) 4.47%
c) 8.00%
d) 6.65%
e)
5.28%
3. Which of the following statements is most correct?
a) The beta coefficient of a stock is normally found by running a regression of past returns on the stock
against past returns on a stock market index.
One could also construct a scatter diagram of returns on
the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta.
b) It is theoretically possible for a stock to have a beta of 1.0.
If a stock did have a beta of 1.0, then at
least in theory, its required rate of return would be equal to the riskless (defaultfree) rate of return,
k
RF
.
c) If you found a stock with a zero beta and held it as the only stock in your portfolio, you would by
definition have a riskless portfolio (meaning zero total risk).
Your 1stock portfolio would have even
less total risk if the stock has a negative beta.
d) The beta of a portfolio of stocks is always larger than the betas of all the individual stocks comprising
the portfolio.
e) All of the above statements are true.
4. Which of the following statements is/are true?:
I. The market risk for an individual firm will be the same for all firms in the same industry.
II. Beta is used to estimate market risk.
III. Market risk is always greater than diversifiable risk.
a) I only
b) II only
c) III only
d) I and II only
e) I and III only
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View Full Document6. King Kong Inc. has 300,000 shares outstanding and paid a dividend of $ 1.27/share
yesterday
.
Today’s price per share is $28 and the company expects an annual dividend growth rate of 10%
forever.
What is the expected return to the shareholders of King Kong Inc.?
a) 15.38%
b) 10.05%
c) 14.54%
d) 13.83%
e) 14.99%
7. Which of the statements following is/are
correct
?
I.
The largest diversification benefit occurs when the correlation is zero.
II. Diversifiable risk is also called systematic or market risk.
III. Diversification reduces total risk in a portfolio.
a) I only
b) II only
c) III only
d) I and II
e) I and III
8. The Undertaker Tombstone Pizza Co. has preferred stock outstanding which pays a dividend of $4 per
share a year.
The current stock price is $32 per share.
Undertaker’s tax rate is 40%.
What is the cost
of preferred stock for Undertaker?
a) 7.5%
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 Fall '08
 SCHAEFF
 Capital Asset Pricing Model, Modern portfolio theory

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