For the following (8) questions, please choose the correct answer.

1) You are considering three different bonds for your portfolio. Each bond has a 10-year maturity and a yield to maturity of 10%. Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Which of the following statements is CORRECT?

a.If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.

b.If the bonds' market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.

c.Bond X has the greatest reinvestment rate risk.

d.If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price.

e.If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.

2) Hazel Morrison, a mutual fund manager, has a $40 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. Hazel expects to receive an additional $60 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 13.00%. What must the average beta of the new stocks be to achieve the target required rate of return?

a.1.76

b.2.04

c.1.85

d.1.94

e.1.68

3)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 past realized return must be equal to the expected return during the same period.

b.the expected future return must be less than the most recent past realized return.

c.the required return must equal the realized return in all periods.

d.the expected future returns must be equal to the required return.

e.the expected return must be equal to both the required future return and the past realized return.

4)Returns for the Alcoff Company over the last 3 years are shown below. What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)

Year Return

2010 21.00%

2009 -12.50%

2008 25.00%

a.22.18%

b.21.11%

c.20.59%

d.21.64%

e.20.08%

5) Gere Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?

a.$972

b.$926

c.$882

d.$1,021

e.$840

6)Reynolds Construction's value of operations is $750 million based on the free cash flow valuation model. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of 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 firm's value of equity, in millions?

a.$475

b.$429

c.$451

d.$525

e.$500

7)Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B

required return 10% 12%

market price $25 $40

expected growth 7% 9%

a.These two stocks should have the same price.

b.These two stocks must have the same dividend yield.

c.These two stocks must have the same expected capital gains yield.

d.These two stocks must have the same expected year-end dividend.

e.These two stocks should have the same expected return.

8)Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B

price $30 $30

expected growth(constant) 6% 4%

required return 12% 10%

a.One year from now, Stock X's price is expected to be higher than Stock Y's price.

b.Stock X has the higher expected year-end dividend.

c.Stock Y has a higher capital gains yield.

d.Stock Y has a higher dividend yield than Stock X.

e.Stock X has a higher dividend yield than Stock Y.