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