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MBA 570 QUIZ #3 Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. A stock is expected to

MBA 570

QUIZ #3

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 1. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 12.5%, and the expected constant growth rate is g = 8.5%. What is the current stock price?

a.

$17.82

b.

$18.28

c.

$18.75

d.

$19.22

e.

$19.70

____ 2. A stock just paid a dividend of D0 = $1.75. The required rate of return is rs = 12.0%, and the constant growth rate is g = 4.0%. What is the current stock price?

a.

$20.56

b.

$21.09

c.

$21.63

d.

$22.18

e.

$22.75

____ 3. Ewert Enterprises' stock currently sells for $30.50 per share. The stock's dividend is projected to increase at a constant rate of 4.50% per year. The required rate of return on the stock, rs, is 10.00%. What is Ewert's expected price 3 years from today?

a.

$31.61

b.

$32.43

c.

$33.26

d.

$34.11

e.

$34.81

____ 4. Gary Wells Inc. plans to issue perpetual preferred stock with an annual dividend of $6.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

a.

$90.37

b.

$92.69

c.

$95.06

d.

$97.50

e.

$100.00

____ 5. Assume that you are a consultant to Magee Inc., and you have been provided with the following data: rRF = 4.00%; Market Risk Premium = 5.00%; and = 1.15. What is the firms required return based on the CAPM?

a.

9.75%

b.

10.04%

c.

10.34%

d.

10.65%

e.

10.97%

____ 6. Currently, the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?

a.

An index fund with beta = 1.0 should have a required return of 11%.

b.

If a stock has a negative beta, its required return must also be negative.

c.

An index fund with beta = 1.0 should have a required return less than 11%.

d.

If a stock's beta doubles, its required return must also double.

e.

An index fund with beta = 1.0 should have a required return greater than 11%.

____ 7. Ritter Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is Ritter's required rate of return?

a.

11.36%

b.

11.65%

c.

11.95%

d.

12.25%

e.

12.55%

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