12. Scotch stock has a beta of 1.17. The market risk premium is 6.5%, and the required rate of return to this stock is 18%. The risk-free rate is closest to what value?

a.

13.8%

b.

10.4%

c.

14.2%

d.

9.9%

13. The use of WACC to select investments is acceptable when the:

a.

NPV is positive when discounted by the WACC.

b.

firm is well diversified and the unsystematic risk is negligible.

c.

correlation of all new projects are equal.

d.

risk of the project is equal to the risk of the firm.

14. One year ago, you purchased a stock at a price of $28 a share. Today, you sold the stock and realized a total return of 25%. Your capital gain was $6 a share. Your dividend yield is closest to what value?

a.

3.75%

b.

18.75%

c.

21.25%

d.

6.25%

e.

1.25%

15. The beta of a security provides an:

a.

estimate of the slope of the Security Market Line.

b.

estimate of the market risk premium.

c.

estimate of the risk of the security.

d.

estimate of the return to the market portfolio

16. 2. Powns, Inc. stock has a beta of 1.26 and an expected return of 12.5%. The risk-free rate of return is 3.0% and the market rate of return is 12.2%. Which one of the following statements is true given this information?

a.

Powns stock has less systematic risk than the overall market.

b.

Powns stock is overpriced.

c.

Powns stock is underpriced.

d.

Powns stock is correctly priced.

e.

The required return on Powns stock, based on the Capital Asset Pricing Model, is 9.88%.

17. The common stock of Eddie's Engines, Inc. sells for $20.00 a share and just paid a dividend of $1.65. Eddie's has established a pattern of increasing their dividends by 4% annually and expects to continue doing so. The market rate of return on this stock is closest to which value?

a.

9%

b.

15%

c.

13%

d.

7%

e.

11%

18. Choco Co. common stock is currently selling for $29.48. The last dividend paid was $1.60 per share. The market rate of return is 10%. The rate at which the dividend is growing is closest to what value?

a.

5.00%

b.

4.57%

c.

6.05%

d.

4.34%

e.

6.91%

19. The DuPont Model measures ROE by multiplying ________.

a.

the profitability ratio x times interest earned x the equity multiplier

b.

the profitability ratio x total asset turnover x the equity multiplier

c.

the current ratio x total asset turnover x the equity multiplier

d.

the current ratio x times interest earned x the equity multiplier

20. Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two years. Von Bora's equity cost of capital is 14%. The price you would be willing to pay today for a share of Von Bora stock, if you plan to hold the stock for two years is closest to:

a.

$23.15

b.

$20.65

c.

$21.55

d.

$22.50

21. Thirty-one Choices. is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 4% a year for the next two years. After that, Thirty-one Choices will maintain a constant dividend of $1.20 a share. Last year, the company paid $1.80 per share. What is this stock worth to you if you require a 10% rate of return?

a.

$11.64

b.

$14.23

c.

$11.11

d.

$12.98

e.

$10.86

Short answer

You have three stocks.For the past three years, the returns to stock X have been 9%, then 11%, then 13% with a standard deviation of 20%.The returns to stock Y have been 13%, then 11%, then 9% with a standard deviation of 18%.The returns to stock Z have been 11%, then 13% then 9% with a standard deviation of 16%.This is the only information you have.Given this information, which stock would you invest in and why? (4 pts)