1. The constant growth model does not work when the growth rate exceeds the required return.

TRUE or FALSE

2. If a stock is growing at a constant rate of 5% with a dividend yield of 3% and the risk free rate is 2%, then the required return on the stock is 8% under a constant growth model.

TRUE or FALSE

3. If a stock increases to $8 from $6, then the return was 25% assuming no dividends were paid.

TRUE or FALSE

4. A stock bought for $20 last year has paid $2 in dividends since then.If the stock is $25 today, then the capital gain is $3.

TRUE or FALSE

5. Operating leverage is related to the amount of debt a firm uses.

TRUE or FALSE

6. The use of an unadjusted WACC for selecting a project is appropriate if the risk of the project is equivalent to the risk of the firm.

TRUE or FALSE

7. If the project IRR and beta coordinates plot below the SML, then the project should be rejected.

TRUE or FALSE

8. Correlation between two assets is the covariance between the two assets times the standard deviations of the two assets.

TRUE or FALSE

9. The variance and the weight of the risky asset drive the standard deviation of a portfolio containing a risky and riskless asset.

TRUE or FALSE

10. In a world with taxes and financial distress costs, Modigliani and Miller find that debt use can increase firm value.

TRUE or FALSE

11. Modigliani and Miller find that the cost of equity rises with debt use.

TRUE or FALSE

12. All else equal, as a firm increases financial leverage, the beta of the firm's stock will rise.

TRUE or FALSE

13. While market values are preferable, it is common to use capital structure targets when computing the WACC, especially for private companies.

TRUE or FALSE

14. U.S. firms tend to use equity before debt when financing growth.

TRUE or FALSE

15. U.S. firms tend to finance growth using external sources only.

TRUE or FALSE

16. A riskless or risk-free asset is presumed to have a return with zero standard deviation.

TRUE or FALSE

17. The portfolio variance of a two-asset portfolio has three terms, two related to the individual underlying assets, and one related to the interaction of the two assets.

TRUE or FALSE

18. The CAPM (or SML) model determines the risk-adjusted required rate of return for a stock.

TRUE or FALSE

19. Geometric averages reflect compounding, while arithmetic averages do not reflect compounding.

TRUE or FALSE

20. Historically, small cap stocks outperform large cap stocks, and bonds outperform stocks on average.

TRUE or FALSE

21. A forward contract is described by agreeing today to buy a product at a later date at a price to be set in the future.

TRUE or FALSE

22. The buyer of a forward contract will be taking delivery of the good(s) today at today's price.

TRUE or FALSE

Chapter 9 - Questions 1 - 5 (5 points each)

91.Given an 8% required rate of return and a risk-free rate of 2%, what is the maximum you are willing to spend per share to buy preferred stock that pays a constant annual dividend of $5.50 per share?

92.Given an 8% required rate of return, a growth rate of 4%, and a risk-free rate of 2%, what is the maximum you are willing to spend per share to buy common stock that just paid a dividend of $4.25 per share?

93.Parsley Gardens common stock sells for $30 a share at a market rate of return of 10%.The company will pay an annual dividend of $1.80 next year.What is the rate of growth of its dividend?

94.Snail, Inc. just paid its first dividend of $1.00.The predicted dividend growth rate over the next two years will be 3% before adjusting up to a faster rate of 4% indefinitely.What is this stock worth to you per share if you demand a 8% rate of return?

95. The Loring Truck Company will have cash flow to the firm of $45 million for the next year.Cash flow will grow continuously at 5% forever.The firm has $100 million in debt and 50 million shares outstanding.Using a constant growth model, if the rate of return (WACC) is 10%,

(i)then what is the value of the firm when using the constant growth model?

(ii)then what is the value of the stock?(Hint: like A=D+E, Firm Value = MV Equity + MV Debt)

Chapter 10 - Questions 1 - 2 (5 points each)

101.What is the arithmetic mean of 10%, -12%, 21%, 8%, -4%, and 13%

102.What is the geometric mean of 10%, -12%, 21%, 8%, -4%, and 13%

Chapter 11 - Questions 1 - 3 (5 points each)

111. The market has an expected rate of return of 12.8%. The U.S. Treasury bill is expected to yield 3.2%. The inflation rate is 3.1%. What is the market risk premium?

112. Your portfolio consists of 30% U.S. Treasury bills, 30% in mutual fund A, and 40% in stock B.Mutual fund A has market level risk.Stock B has a beta of 1.5.What is the beta of the portfolio?

113. A portfolio has 20% of its funds invested in Security A, 75% of its funds invested in Security B, and 5% invested in the risk free asset.The risk-free asset earns 4%.Security A has an expected return of 8% and a standard deviation of 18%. Security B has an expected return of 10% and a standard deviation of 22%.Securities A and B have a coefficient of correlation of 0.60.

What is the standard deviation of the portfolio?

What is the expected return of the portfolio?

Chapter 13 - Questions 1 to 5 (5 points each)

1.Peter's Pumpkin Patch has a cost of debt of 4%, a cost of equity of 11%, and a cost of preferred stock of 8%.The firm has 10,000 shares of common stock outstanding at a market price of $20 a share.There are no shares of preferred stock outstanding.The bond issue has a total face value of $50,000 and sells at face value ($1,000).The tax rate is 30%.What is the weighted average cost of capital for Peter's Pumpkin Patch?

2.Jack's Bean Stalks common stock has a beta of 0.95.The U.S. Treasury bill (r_f) is yielding 2% and the expected market return is 12%.Jack's tax rate is 35%.What is Jack's cost of equity capital?

3.Jack's Bean Stalks has 80,000 bonds outstanding that pay $25 every six months.The bonds are currently selling for $875 and mature in 5 years.The U.S. Treasury bill (r_f) is yielding 2% and the expected market return is 12%.Jack's tax rate is 35%.What is Jack's cost of debt capital?

4.What is the target debt to equity ratio if The Attatiki Food Co. wants a WACC of 12%?Attatiki has a cost of equity capital of 15%, their cost of debt before taxes is 10%, and their tax rate is 40%.(Note: Wd + We = 1)

Chapter 25 - 1 Questions (total 3 points)

251. Suppose you purchase a gold futures contract with a price of $1382 per ounce by the end of the month. The current price of gold closes at $1375. The spot price of gold then rises to $1380 the next day. If the futures contract is marking to market on a daily basis as the price changes, what is your cash flow at the end of the next business day?