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Given the following returns on Stock J and the "market" during the last three years, what is the beta coefficient of Stock J? (Hint: Think rise over run.)


A) 1.58
B) 1.66
C) 1.75
D) 1.84
E) 1.93

F) None of the above
G) All of the above

Correct Answer

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(The following information applies to the next two problems.) You have been asked to use a CAPM analysis to choose between Stocks R and S, with your choice being the one whose expected rate of return exceeds its required return by the widest margin. The risk-free rate is 6%, and the required return on an average stock (or the "market") is 10%. Your security analyst tells you that Stock S's expected rate of return is equal to 11%, while Stock R's expected rate of return is equal to 12%. The CAPM is assumed to be a valid method for selecting stocks, but the expected return for any given investor (such as you) can differ from the required rate of return for a given stock. The following past rates of return are to be used to calculate the two stocks' beta coefficients, which are then to be used to determine the stocks' required rates of return: Note: The averages of the historical returns are not needed, and they are generally not equal to the expected future returns. -Set up the SML equation and use it to calculate both stocks' required rates of return, and compare those required returns with the expected returns given above. You should invest in the stock whose expected return exceeds its required return by the widest margin. What is the widest positive margin, or greatest excess return (expected return - required return) ?


A) 1.97%
B) 2.19%
C) 2.43%
D) 2.70%
E) 3.00%

F) A) and E)
G) B) and D)

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Chapter 7 of the Bankruptcy Act is designed to do all of the following EXCEPT:


A) Provides safeguards against the withdrawal of assets by the owners of the bankrupt firm.
B) Allows insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt.
C) Provides for an equitable distribution of the assets among the creditors.
D) Details the procedures to be followed when a firm is liquidated.
E) Establishes the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments.

F) All of the above
G) A) and B)

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Which of the following statement completions is NOT CORRECT? For a profitable firm, when MACRS accelerated depreciation is compared to straight-line depreciation, MACRS accelerated allowances produce


A) Higher depreciation charges in the early years of an asset's life.
B) Larger cash flows in the earlier years of an asset's life.
C) Larger total undiscounted profits from the project over the project's life.
D) Smaller accounting profits in the early years, assuming the company uses the same depreciation method for tax and book purposes.
E) Lower tax payments in the earlier years of an asset's life.

F) A) and B)
G) D) and E)

Correct Answer

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If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

A) True
B) False

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Stock X and the "market" have had the following rates of returns over the past four years. 60% of your portfolio is invested in Stock X and the remaining 40% is invested in Stock Y. The risk-free rate is 6% and the market risk premium is also 6%. You estimate that 14% is the required rate of return on your portfolio. What is the beta of Stock Y?


A) 1.72
B) 1.91
C) 2.10
D) 2.31
E) 2.54

F) B) and E)
G) C) and D)

Correct Answer

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For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then


A) the expected future return must be less than the most recent past realized return.
B) The past realized return must be equal to the expected return during the same period.
C) the required return must equal the realized return in all periods.
D) the expected return must be equal to both the required future return and the past realized return.
E) the expected future returns must be equal to the required return.

F) A) and B)
G) D) and E)

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Hanratty Inc.'s stock and the stock market have generated the following returns over the past five years: What is the estimated beta of Hanratty Inc.'s stock?


A) 1.0333
B) 1.1481
C) 1.2757
D) 1.4032
E) 1.5436

F) A) and B)
G) A) and C)

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If markets are in equilibrium, which of the following conditions will exist?


A) Each stock's expected return should equal its realized return as seen by the marginal investor.
B) Each stock's expected return should equal its required return as seen by the marginal investor.
C) All stocks should have the same expected return as seen by the marginal investor.
D) The expected and required returns on stocks and bonds should be equal.
E) All stocks should have the same realized return during the coming year.

F) B) and C)
G) B) and D)

Correct Answer

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Sunshine Inc. has two equally-sized divisions. Division A has a beta of 0.8 and Division B has a beta of 1.2. The company is 100% equity financed. The risk-free rate is 6% and the market risk premium is 5%. Sunshine assigns different hurdle rates to each division based on each division's market risk. Which of the following statements is CORRECT?


A) Sunshine's composite WACC is 10%.
B) Division B has a lower WACC than Division A.
C) If the same WACC is used for each division, the firm would select too many Division A projects and reject too many Division B projects.
D) If the same WACC is used for each division, the firm would select too many Division B projects and reject too many Division A projects.
E) Sunshine's composite WACC is 12%.

F) B) and C)
G) A) and E)

Correct Answer

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Assume one bank offers you a nominal annual interest rate of 6% compounded daily while another bank offers you continuous compounding at a 5.9% nominal annual rate. You decide to deposit $1,000 with each bank. Exactly two years later you withdraw your funds from both banks. What is the difference in your withdrawal amounts between the two banks?


A) $2.24
B) $2.35
C) $2.47
D) $2.59
E) $2.72

F) A) and E)
G) All of the above

Correct Answer

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At the beginning of the year, you purchased a 5-year zero coupon bond with a yield to maturity of 6.8% and a face value of $1,000. Your tax rate is 30%. What is the total tax that you will have to pay on the bond during the first year?


A) $13.95
B) $14.68
C) $15.42
D) $16.19
E) $17.00

F) A) and E)
G) A) and D)

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In six years' time, you are scheduled to receive money from a trust established by your grandparents. When the trust matures there will be $100,000 in the account. If the account earns 9% compounded continuously, how much is in the account today?


A) $55,361.08
B) $58,274.83
C) $61,188.57
D) $64,247.99
E) $67,460.39

F) A) and C)
G) C) and D)

Correct Answer

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Which of the following methods involves calculating an average beta for comparable firms and using that beta to determine a project's beta?


A) Risk premium method
B) Pure play method
C) Accounting beta method
D) CAPM method
E) Discounted cash flow model

F) A) and B)
G) A) and C)

Correct Answer

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Below are the returns for the past five years for Stock S and for the overall market: What is the estimated beta of Stock S?


A) 1.4320
B) 1.5036
C) 1.5788
D) 1.6577
E) 1.7406

F) C) and D)
G) A) and B)

Correct Answer

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For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor's required return.

A) True
B) False

Correct Answer

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