1. Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?(Points : 3)

7.72%

8.12%

8.55%

9.00%

9.50%

Question 2. 2. The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. (Points : 3)

True False

Question 3. 3. Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse. (Points : 3)

True False

Question 4. 4. Diversification will normally reduce the riskiness of a portfolio of stocks. (Points : 3)

True False

Question 5. 5. In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data. (Points : 3)

True False

Question 6. 6. Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0. (Points : 3)

True False

Question 7. 7. The relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio. (Points : 3)

True False

Question 8. 8. Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders. (Points : 3)

True False

Question 9. 9. Someone who is risk averse has a general dislike for risk and a preference for certainty. If risk aversion exists in the market, then investors in general are willing to accept somewhat lower returns on less risky securities. Different investors have different degrees of risk aversion, and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk. (Points : 3)

True False

Question 10. 10. A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms. (Points : 3)

True False

Question 11. 11. If the returns of two firms are negatively correlated, then one of them must have a negative beta. (Points : 3)

True False

Question 12. 12. Portfolio A has only one security, while Portfolio B has 100 securities. Because of diversification effects, we would expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky. (Points : 3)

True False

Question 13. 13. We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security. (Points : 3)

True False

Question 14. 14. A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms. (Points : 3)

True False

Question 15. 15. The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value. (Points : 3)

True False

Question 16. 16. Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock. (Points : 3)

True False

Question 17. 17. The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond. (Points : 3)

True False

Question 18. 18. Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the firms total corporate value. (Points : 3)

True False

Question 19. 19. Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond. (Points : 3)

True False

Question 20. 20. From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky. (Points : 3)

True False

Question 21. 21. If in the opinion of a given investor a stocks expected return exceeds its required return, this suggests that the investor thinks(Points : 3)

the stock is experiencing supernormal growth. the stock should be sold. the stock is a good buy. management is probably not trying to maximize the price per share. dividends are not likely to be declared.

Question 22. 22. The preemptive right is important to shareholders because it(Points : 3)

allows managers to buy additional shares below the current market price. will result in higher dividends per share. is included in every corporate charter. protects the current shareholders against a dilution of their ownership interests. protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.

Question 23. 23. Which of the following statements is CORRECT?(Points : 3)

Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. The preferred stock of a given firm is generally less risky to investors than the same firms common stock. Corporations cannot buy the preferred stocks of other corporations. Preferred dividends are not generally cumulative. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.

Question 24. 24. Multiple Choice: Problems

Most of these problems are straightforward and only moderately difficult. However, a few of the later ones are relatively difficult and should be used primarily on take-home exams for students with some experience with Excel. Problems with * in the topic line are nonalgorithmic.

Based on the corporate valuation model, Wang Inc.s total corporate value is $750 million. Its balance sheet shows $100 million notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firms value of equity, in millions?

(Points : 3)

$386 $406 $428 $450 $473

Question 25.25. Based on the corporate valuation model, Morgan Inc.s total corporate value is $300 million. The balance sheet shows $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stocks price per share?(Points : 3)

$12.00 $12.64 $13.30 $14.00 $14.70