Correct Answers in Bold
Finance 301
Fall 2007
Exam 3 Review
Correct answers in Bold
1. Suppose a firm’s stock is selling for $10.50. They just paid a $1 dividend and dividends are expected to grow at 5% per year. What is the required return?
A. 10%
B. 12%
C. 15%
D. 17%
2. Using the information above, what is the dividend yield?
A. 7%
B. 8%
C. 10%
D. 12%
3. Using the information from Problem 1, what is the capital gains yield?
A. 4%
B. 5%
C. 6%
D. 7%
4. Martell Mining Company’s ore reserves are being depleted, so its sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 5 percent per year. They just paid a dividend of $5 and the required return is 15%. What is the value of Martell Mining’s stock?
A. $19.20
B. $21.70
C. $23.75
D. $25.05
5. You have been managing a $5 million portfolio. The portfolio has a beta of 1.25 and a required rate of return of 12 percent. The current risk-free rate is 5.25%. Assume that you receive another $500,000. If you invest the money in a stock that has a beta of 0.75, what will be the required return on your $5.5 million portfolio?
A. 10.50%
B. 11.75%
C. 12.00%
D. 12.25%
6. Given the following information, determine which beta coefficient for Stock J is consistent with equilibrium:
rj=12.5% r rf=4.5% rm=10.5%
A. 1.05
B. 1.23
C. 1.27
D. 1.33
Use the following information for problems 7-9. Stocks X and Y have the following probability distributions of expected future returns:
Probability X Y
0.1 -10% -35%
0.2 2% 0%
0.4 12% 20%
0.2 20% 25%
0.1 38% 45%
7. Calculate the expected rate of return for Stock Y.
A. 12.00%
B. 13.00%
C. 14.00%
D. 15.00%
8. Calculate the standard deviation for Stock X.
A. 12.00%
B. 12.10%
C. 12.20%
D. 12.30%
9. Calculate the coefficient of variation for Stock X.
A. 1.00
B. 1.02
C. 1.05
D. 1.10
10. Stewart Corp. just paid a dividend of $4. The dividend is expected to grow at 20% next year, 15% for the next 2 years, and 5% from then on. If the rate of return is 13%, what is the price of shares today?
A. $70.76
B. $73.34
C. $78.26
D. $83.38
11. Currently shares are selling $22.50 at the Gold Corp who just paid a dividend of $1.50. The growth rate is 5 percent. What is the required return?
A. 7%
B. 10%
C. 11%
D. 12%
12. Suppose you are the money manager of a $4 million investment fund. The fund consists of 4 stocks with the following investments and betas:
Stock Investment Beta
A $400,000 1.50
B $600,000 -0.50
C $1,000,000 1.25
D $2,000,000 0.75
If the market’s required rate of return is 14 percent and the risk-free rate is 6 percent, what is the fund’s required rate of return?
A. 12.00%
B. 12.05%
C. 12.10%
D. 12.15%
13. A company just paid a dividend of $2.00. The growth rate is 5% and the required rate of return is 12%. What is price of the stock 4 years from now (P4)?
A. $36.47
B. $34.73
C. $18.23
D. $8.00