Podcast
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?
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?
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?
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 ______?
Total risk is measured by _____, and systematic risk is measured by ______?
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?
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?
Signup and view all the answers
Unsystematic risk:
Unsystematic risk:
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?
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?
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.
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.
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?
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?
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)?
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)?
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?
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?
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?
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?
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?
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?
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
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
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?
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?
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?
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?
Signup and view all the answers
Study Notes
Question 1: Required Return on Stock
- Beta of Bowie Enterprises stock: 1.17
- Expected market return: 11.90%
- Risk-free rate: 3.10%
- Required return on the company's stock: 13.40%
Question 2: Aftertax Cost of Debt
- Bond price: $2,156
- Maturity: 16 years
- Coupon rate: 5.98%
- Face value: $2,000
- Company's tax rate: 35%
- Aftertax cost of debt: 3.41%
Question 3: Weighted Average Cost of Capital (WACC)
- Cost of equity: 11.05%
- Pretax cost of debt: 5.40%
- Tax rate: 35%
- Book value debt percentage: 69%
- Market value debt percentage: 55%
- WACC: 6.90%
Question 4: Risk Measurement
- Total risk is measured by standard deviation.
- Systematic risk is measured by beta.
Question 5: Expected Return
- Stock beta: 0.85
- Reward-to-risk ratio: 6.51%
- Risk-free rate: 2.1%
- Stock's expected return: 7.63%
Question 6: Unsystematic Risk
- Definition: Can be eliminated by portfolio diversification.
Question 7: Expected Return of Stock
- Risk-free rate: 2.4%
- Market expected return: 12.1%
- Stock beta: 0.88
- Expected return of the stock: 10.94%
Question 8: Diversifiable Risks
- Idiosyncratic risks can be reduced by investing in unrelated securities.
- There's no reward for accepting diversifiable risks.
- Diversifiable risks are associated with individual firms or industries.
- Beta doesn't measure diversifiable risk.
Question 9: Portfolio Beta
- Portfolio invested in Stock R: 16%
- Portfolio invested in Stock S: 36%
- Stock R beta: 0.61
- Stock S beta: 1.16
- Portfolio beta: 1.27
- Stock T beta: unknown
Question 10: Debt-Equity Ratio
- Cost of equity: 10.6%
- Pretax cost of debt: 5.2%
- Tax rate: 39%
- WACC: 7.59%
- Debt-equity ratio (market value): 0.68
Question 11: Cost of Equity
- Annual dividend: $3.49
- Dividend growth rate: 3.60%
- Current stock price: $43.00
- Cost of equity: 12.01%
Question 12: Project Net Present Value (NPV)
- Market value of equity: $10.3 million
- Market value of debt: $3.40 million
- Risk adjustment factor: 1.1%
- Project cost: $2.10 million
- Annual cash flows: $551,000 for 6 years
- Cost of equity: 10.87%
- Pretax cost of debt: 6.83%
- Tax rate: 35%
- Project's NPV: $273,667
Question 13: Common stock outstanding
- Shares outstanding: 7,400
- Price per share: $97
Question 14: Portfolio Beta Calculation
- Stock A Amount Invested and beta: $3,900, 1.42
- Stock B Amount Invested and beta: $4,900, 1.53
- Stock C Amount Invested and beta: $7,400, 1.00
- Portfolio beta: 1.261
Question 15: Risk-Free Rate
- Expected return on ABD stock: 14.50%
- Expected market return: 13.2%
- ABD stock beta: 1.15
- Risk-free rate: 4.53%
Question 16: Stock A Expected Return
- Risk-free rate: 4%
- Market portfolio expected return: 12%
- Market portfolio standard deviation: 15%
- Stock A standard deviation: 20%
- Correlation coefficient: 0.06
- Stock A beta: 0.08
- Stock A expected return: 4.64%
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz covers key concepts in finance related to risk and return, including calculations for required return on stock, aftertax cost of debt, and weighted average cost of capital (WACC). It also explores the definitions of total, systematic, and unsystematic risk, along with expected returns. Perfect for students looking to test their understanding of financial principles.
