3.
Standard deviation is a measure of which one of the following?
A. average rate of return
B. volatility
C. probability
D. risk premium
E. real returns
Refer to section 12.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Ho
FIN204a: Advanced Corporate Finance: Theory and Practice
Prof. Debarshi Nandy
1. The Financing Decision
How should the firm raise the money to invest in the projects it wants to undertake? Till now, when
we studied the investment decision, we pretended th
1
The Clean Air Act and its impact
The acid rain became a serious problem in 1990s. In order to control the pollution, especially the
release of sulfur dioxide, government passed the Clean Air Acts in November 1990 and the act
will be effective in 1995. I
Payback
A project earns $3000 in the first year, $4000 in
the second year, $10,000 in the third year, and
$10,000 in the fourth year. Assuming that the
initial investment required for the project is
$12,000, what is the projects payback period?
0
CF
1
2
FIN204a: Advanced Corporate Finance: Theory and Practice
Prof. Debarshi Nandy
1. Dividends as "signals" of insider information
The empirical evidence indicates that announcements of changes in a firm's dividend policy result in
dramatic changes in the fir
CAPITAL STRUCTURE
Inputs
Debt Value
Equity Value
Unlevered Cost of Equity Capital
Cost of Debt
Total Value
Modigliani-Miller With No Taxes
$1,300
$1,800
11.00%
7.00%
Cost of Capital With No Taxes
20.0%
Cost of Equity
18.0%
WACC
Cost of Debt
16.0%
Cost of
Review Problems for Time Value of Money
1) What is the present value (PV) of $50,000 received 20 years from now, assuming the interest
rate is 4% per year?
2) Helen is saving to start a business. If she invests $10,000 in a savings account now, which of
t
1
FIN204a: Advanced Corporate Finance: Theory and Practice
Prof. Debarshi Nandy
1. When does the financing mix (capital structure) matter?
Till now, we talked about situations in which the financing choice of the firm is irrelevant. When
will capital stru
Risk and Return Review Problems
1. Taggart Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing
a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate
of return and standard deviation?
2.
Stock Valuation Review Problems
1 .Credenza Industries is expected to pay a dividend of $1.20 at the end of the coming year
(Div1). It is expected to sell for $62.00 at the end of the year. If its equity cost of capital is 8%,
what is the expected capital
FIN204a: Advanced Corporate Finance: Theory and Practice
Prof. Debarshi Nandy
"Morality is all right, but what about dividends?"-Kaiser Wilhelm II
1. Dividend Policy
Dividend policy is concerned with the following issues: Out of the earnings of the compan
Bond Valuation Review Problems
1. How are the cash flows of a coupon bond different from an amortizing loan?
2. How are investors in zero-coupon bonds compensated for making such an investment?
A) Such bonds are purchased at their face value and sold at a
48.
According to theory, studying historical stock price movements to identify
mispriced stocks:
A. is effective as long as the market is only semistrong form efficient.
B. is effective provided the market is only weak form efficient.
C. is ineffective ev
58.
West Wind Tours stock is currently selling for $48 a share. The stock has a
dividend yield of 3.2 percent. How much dividend income will you receive per
year if you purchase 200 shares of this stock?
A. $24.96
B. $36.20
C. $424.80
D. $362.00
E. $307.2
Chapter 13 Return, Risk, and the Security Market Line Answer Key
Multiple Choice Questions
1.
You own a stock that you think will produce a return of 11 percent in a good
economy and 3 percent in a poor economy. Given the probabilities of each
state of th
98.
You want to invest in an index fund which directly correlates to the overall U.S.
stock market. How can you determine if the market risk premium you are
expecting to earn is reasonable for the long-term?
You could compare your expectation to the histo
28.
What was the average rate of inflation over the period of 1926-2010?
A. less than 2.0 percent
B. between 2.0 and 2.5 percent
C. between 2.5 and 3.0 percent
D. between 3.0 and 3.5 percent
E. greater than 3.5 percent
Refer to section 12.3
AACSB: Analyti
53.
Individuals who continually monitor the financial markets seeking mispriced
securities:
A. earn excess profits over the long-term.
B. make the markets increasingly more efficient.
C. are never able to find a security that is temporarily mispriced.
D.
56.
According to CAPM, the amount of reward an investor receives for bearing the
risk of an individual security depends upon the:
A. amount of total risk assumed and the market risk premium.
B. market risk premium and the amount of systematic risk inheren
61.
The common stock of Manchester & Moore is expected to earn 13 percent in a
recession, 6 percent in a normal economy, and lose 4 percent in a booming
economy. The probability of a boom is 5 percent while the probability of a
recession is 45 percent. Wh
46.
Total risk is measured by _ and systematic risk is measured by _.
A. beta; alpha
B. beta; standard deviation
C. alpha; beta
D. standard deviation; beta
E. standard deviation; variance
Refer to section 13.6
AACSB: Analytic
Blooms: Remember
Difficulty:
94. Define and explain the three forms of market efficiency.
95. What are the two primary lessons learned from capital market history? Use
historical information to justify that these lessons are correct.
96. How can an investor lose money on a stock whil
74. What is the expected return on a portfolio comprised of $6,200 of stock M and
$4,500 of stock N if the economy enjoys a boom period?
A. 10.93 percent
B. 11.16 percent
C. 12.55 percent
D. 12.78 percent
E. 13.69 percent
75. What is the variance of the r
23.
Which one of the following statements concerning U.S. Treasury bills is correct
for the period 1926- 2010?
A. The annual rate of return always exceeded the annual inflation rate.
B. The average risk premium was 0.7 percent.
C. The annual rate of retur
18.
Which one of the following categories of securities had the highest average
return for the period 1926-2010?
A. U.S. Treasury bills
B. large company stocks
C. small company stocks
D. long-term corporate bonds
E. long-term government bonds
Refer to sec