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(Solution document) Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.


1.    Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. According to Capital Asset Pricing Model (CAPM), which of the following statements is CORRECT?

A. B

Beta. 1.10. 0.90


a. Stock A must have a higher expected return than Stock B.

b. Stock A must have a lower expected return than Stock B.

c. The expected return of Stock A is equal to that of Stock B.

d. None of the above is correct.


2- 1.    When considering the time value of money in making an investment decision, an investor would purchase a property when:

I. Present Value < purchase price

II. IRR (Internal Rate of Return) < discount rate (investor's required return)

a. I only

b. II only

c. both I and II

d. neither I nor II


3- 1.    You are considering the purchase of a small income-producing property for $150,000 that is expected to produce the following net cash flows:

End of Year. Cash Flow

1. $50,000

2 $50,000

3. $50,000

4. $60,000

1.    What is the internal rate of return (IRR) on this investment?

a. 14.29%

b. 14.51%

c. 14.90%

d. 22.56%

4- 1.    You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% annual interest and compounded quarterly. How much will you have just after you make the 3rd deposit, 3 years from now?

a. $11,973

b. $12,603

c. $13,267

d. $13,280


5- 1.    How many years will it take for your funds to triple if a bank pays you an annual rate of 3.8% and compounded monthly?

a. 26.26

b. 27.58

c. 28.96

d. 29.46

6- 1.    Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 7 years at $1,050. What is their yield to call (YTC)?

a. 5.39%

b. 6.72%

c. 7.45%

d. 8.57%

7- 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 = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?

a. $17.39

b. $17.84

c. $18.29

d. $18.75

8- 1.    Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

a. Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).

b. Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

c. Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

d. Investment D pays $2,500 at the end of 10 years (just one payment).

 







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