Finance Chapter: Risk and Return Calculations

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Questions and Answers

The stock in Bowie Enterprises has a beta of 1.17. The expected return on the market is 11.90 percent and the risk-free rate is 3.10 percent. What is the required return on the company's stock?

13.40%

Mojo Mining has a bond outstanding that sells for $2,156 and matures in 16 years. The bond pays semiannual coupons and has a coupon rate of 5.98 percent. The face value is $2,000. If the company's tax rate is 35 percent, what is the aftertax cost of debt?

3.41%

Take It All Away has a cost of equity of 11.05 percent, a pretax cost of debt of 5.40 percent, and a tax rate of 35 percent. The company's capital structure consists of 69 percent debt on a book value basis, but debt is 55 percent of the company's value on a market value basis. What is the company's WACC?

6.90%

Total risk is measured by _, and systematic risk is measured by __?

Standard deviation; beta Signup and view all the answers

A stock has a beta of .85 and a reward-to-risk ratio of 6.51 percent. If the risk-free rate is 2.1 percent, what is the stock's expected return?

7.63% Signup and view all the answers

Unsystematic risk:

Can be effectively eliminated by portfolio diversification. Signup and view all the answers

The risk-free rate is 2.4 percent and the market expected return is 12.1 percent. What is the expected return of a stock that has a beta of .88?

10.94% Signup and view all the answers

Which of the following statements are correct concerning diversifiable risks? 1. Idiosyncratic risks can be reduced by investing in unrelated securities. 2. There is no reward for accepting diversifiable risks. 3. Diversifiable risks are generally associated with an individual firm or industry. 4. Beta measures diversifiable risk.

1, 2, and 3 only (B) Signup and view all the answers

You have a portfolio that is invested 16 percent in Stock R, 36 percent in Stock S, and the remainder in Stock T. The beta of Stock R is .61, and the beta of Stock S is 1.16. The beta of your portfolio is 1.27. What is the beta of Stock T?

1.57 Signup and view all the answers

Kountry Kitchen has a cost of equity of 10.6 percent, a pretax cost of debt of 5.2 percent, and the tax rate is 39 percent. If the company's WACC is 7.59 percent, what is its debt-equity ratio (i.e., ratio of market value of debt over market value of equity)?

0.68 Signup and view all the answers

ABC Inc. just paid an annual dividend of $3.49 on its common stock. The firm increases its dividend by 3.60 percent annually. What is the company's cost of equity if the current stock price is $43.00 per share?

12.01% Signup and view all the answers

Dyrdek Enterprises has equity with a market value of $10.3 million and the market value of debt is $3.40 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.1 percent (that is, adding 1.1% to the firm WACC to get the project discount rate). The new project will cost $2.10 million today and provide annual cash flows of $551,000 for the next 6 years. The company's cost of equity is 10.87 percent and the pretax cost of debt is 6.83 percent. The tax rate is 35 percent. What is the project's NPV?

$273,667 Signup and view all the answers

Here I Sit Sofas has 7,400 shares of common stock outstanding at a price of $97 per share. There are 720 bonds that mature in 33 years with a coupon rate of 7.1 percent paid semiannually. The bonds have a face value of $2,000 each and sell at 150 percent of face value. The company also has 6,300 shares of preferred stock outstanding at a price of $50 per share. What is the capital structure weight of the debt?

0.6765 Signup and view all the answers

What is the beta of a portfolio comprised of the following securities? Stock Amount Invested Security Beta A $3,900 1.42 B $4,900 1.53 C $7,400 1.00

1.261 Signup and view all the answers

The expected return on ABD stock is 14.50 percent while the expected return on the market is 13.2 percent. The beta of ABD is 1.15. What is the risk-free rate of return?

4.53% Signup and view all the answers

Suppose the risk-free rate is 4%. The expected return of the market portfolio is 12%, while the standard deviation of the market portfolio return is 15%. The return of stock A has a standard deviation of 20% and correlation coefficient with the market portfolio return of 0.06. What is stock A's beta? What is stock A's expected return?

Beta: 0.08, Expected Return: 4.64% Signup and view all the answers

Flashcards

Required Return

The rate of return an investor expects to receive on a given investment, considering its risk level.

Beta

A measure of a security's volatility relative to the overall market. A beta of 1 indicates the security moves in sync with the market. A beta greater than 1 means the security is more volatile than the market, and a beta less than 1 means it's less volatile.

Risk-Free Rate

The return on a risk-free investment, typically considered a U.S. Treasury bond.

Market Expected Return

The expected return on the overall market, often represented by a broad market index like the S&P 500.