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PRACTICETEST

1.Thereturnonwhichoneofthefollowingisusedastheriskfreerateofreturn?
a.longtermcorporatebonds
b.longtermgovernmentbonds
c.shorttermcorporatebonds
d.U.S.Treasurybills
e.theConsumerPriceIndex
2.TheCEOofJerichoIndustriesjustannouncedthatthefirmhasreceivedapatentfora
productthatwillconverthouseholdgarbageintousablefuelwithoutcreatingany
hazardouswaste.Thisnewsistotallyasurpriseandseenasamajortechnological
advancement.Whichoneofthefollowingreactionstothisdevelopmentbestindicatesan
efficientmarket?
a.ThepriceofJerichostockremainsunchanged.
b.ThepriceofJerichostockincreasesrapidlyandthensettlesbacktoitsoriginalvalue.
c.ThepriceofJerichostockincreasesrapidlyandthenlevelsoffatthehighervalue.
d.AllstocksquicklyincreaseinvalueandthenallbutJerichostockfallbacktotheir
originalvalues.
e.Thevalueofallstockssuddenlyincreaseandthenleveloffattheirhighervalues.
3.ThestockofWebster'sFoodsispricedat$31ashareandhasadividendyieldof2.8
percent.Thefirmpaysconstantannualdividends.Whatistheamountofthenext
dividendpershare?
a.$.740
b.$.868
c.$.927
d.$1.03
e.$1.07
4.TrumanFloristspaysaconstantannualdividendof$2.20pershareonitsstock.Last
yearatthistime,themarketrateofreturnonthisstockwas12.6percent.Today,the
marketratehasfallento9.7percent.Whatwouldyourcapitalgainsyieldhavebeenif
youhadpurchasedthisstockoneyearagoandthensoldthestocktoday?
a.2.90percent
b.9.70percent
c.14.57percent
d.23.02percent
e.29.90percent

5.Overthepast6years,astockproducedreturnsof11percent,20percent,7percent,18
percent,12percent,and3percent.Basedonthesesixyears,whatrangeofreturnswould
youexpecttosee95percentofthetime?
a. 10.61percentto15.47percent
b. 10.61percentto24.30percent
c. 10.61percentto29.61percent
d. 11.40percentto15.47percent
e. 11.40percentto24.30percent
6.Astockhasanaveragereturnof13.6percentandastandarddeviationof8.4percent.
Inanyonegivenyear,youhavea95percentchancethatyouwillnotlosemorethan
_____percentnorearnmorethan____percentifyouinvestinthissecurity.
a. 5.2percentto22.0percent
b. 3.2percentto30.4percent
c.3.2percentto30.4percent
d.5.2percentto22.0percent
e.13.6percentto38.8percent
7.Overthelastfouryears,thestockofWagner'sPaintshashadanarithmeticaverage
returnof6.5percent.Threeofthosefouryearsproducedreturnsof9percent,3percent,
and 1percent.Whatisthegeometricaveragereturnforthis4yearperiod?
a.3.00percent
b.4.48percent
c.6.33percent
d.7.07percent
e.8.69percent
8.Theexpectedreturnonasecurityiscurrentlybasedona75percentchanceofa14
percentreturngivenaneconomicboomanda25percentchanceofa6percentreturn
givenanormaleconomy.Whichofthefollowingchangeswillincreasetheexpected
returnonthissecurity?
I.anincreaseintheprobabilityofaneconomicboom
II.adecreaseintherateofreturngivenanormaleconomy
III.anincreaseintheprobabilityofanormaleconomy
IV.anincreaseintherateofreturngivenaneconomicboom
a.IandIIonly
b.IandIVonly
c.IIandIIIonly
d.I,III,andIVonly
e.I,II,III,andIV

9.Whichoneofthefollowingportfolioshastheleastamountofsystematicrisk?
a.aportfoliothatduplicatestheoverallmarket
b.aportfoliocomprisedof50percentcashand50percentlargecompanystocks
c.aportfolioconsistingofvariousU.S.Treasurybills
d.astockportfoliowithaportfoliobetaof1.8
e.adiversifiedportfoliowithaportfoliobetaof0.7
10.Thebetaofaportfoliocannotbelessthan_____norgreaterthan_____.
a.0;1
b.1;2
c.thelowestindividualbetaintheportfolio;1
d.1;thehighestindividualbetaintheportfolio
e.thelowestindividualbetaintheportfolio;thehighestindividualbetaintheportfolio
11.Youownaportfoliooftwostocks,AandB.StockAisvaluedat$3,240andhasan
expectedreturnof10.5percent.StockBhasanexpectedreturnof14.7percent.Whatis
theexpectedreturnontheportfolioiftheportfoliovalueis$5,860?
a.11.20percent
b.12.38percent
c.12.46percent
d.14.03percent
e.14.29percent
12.Youwanttocreatea$25,000portfoliothatconsistsofthreestocksandhasan
expectedreturnof13percent.Currently,youown$15,500ofstockAand$6,000of
stockB.TheexpectedreturnforstockAis14.5percent,andforstockBitis9.2percent.
WhatistheexpectedrateofreturnforstockC?
a.11.21percent
b.11.58percent
c.12.62percent
d.12.87percent
e.13.20percent
13.Youowna$90,000portfoliothatisinvestedinstockAandB.Theportfoliobetais
equaltothemarketbeta.StockAhasanexpectedreturnof14.1percentandabetaof1.2.
StockBhasabetaof.76.WhatisthevalueofyourinvestmentinstockA?
a.$39,333
b.$40,909
c.$49,091
d.$50,545
e.$50,667

14.Giventhefollowinginformation,whatisthevarianceofaportfoliothatisinvested
25percentinbothstocksAandC,and50percentinstockB?

a..000025
b..000106
c..000232
d..001414
e..005285

15.Youwouldliketocreateaportfoliothatisequallyinvestedinariskfreeassetand
twostocks.Theonestockhasabetaof.80.Whatdoesthebetaofthesecondstockhave
tobeifyouwanttheportfoliorisktoequalthatoftheoverallmarket?
a.1.4
b.1.6
c.1.8
d.2.0
e.2.2
16.Theriskfreerateis3.5percentandtheexpectedreturnonthemarketis11percent.
StockAhasabetaof1.1andanexpectedreturnof12percent.StockBhasabetaof.92
andanexpectedreturnof10.25percent.Arethesestockscorrectlypriced?Whyorwhy
not?
a.No;StockAisunderpricedandstockBisoverpriced.
b.No;StockAisoverpricedandstockBisunderpriced.
c.No;StockAisoverpricedbutstockBiscorrectlypriced.
d.No;StockAisunderpricedbutstockBiscorrectlypriced.
e.Yes;Bothstocksarecorrectlypriced.
17.Unsystematicrisk:
I.isalsocalleduniquerisk.
II.isalsocalledassetspecificrisk.
III.affectsalimitednumberofassets.
IV.affectsalargenumberofassets.
a.IandIIIonly
b.IIandIVonly
c.IandIVonly
d.I,II,andIIIonly
e.I,II,andIVonly

18.Theweightedaveragecostofcapitalisdefinedastheweightedaverageofafirm's:
a.returnonitsinvestments.
b.costofequityanditsaftertaxcostofdebt.
c.pretaxcostofdebtandequitysecurities.
d.bondcouponrates.
e.dividendandcapitalgainsyields.

19.Whichoneofthefollowingistheprimarydeterminantofthecostofcapitalfora
proposedproject?
a.amountofdebtusedtofinancetheproject
b.use,orlackthereof,ofpreferredstocktofinancetheproject
c.combinedsourcesoffundsusedtofinancetheproject
d.theriskleveloftheproject
e.lengthoftheproject'slife
20.Inanefficientmarket,asecuritywithabetaof1.03willhavearateofreturnthat
plots:
a.justbelowthesecuritymarketline(SML)andtotheleftofthemarketreturn.
b.justbelowtheSMLandtotherightofthemarketreturn.
c.ontheSMLjusttotheleftofthemarketreturn.
d.ontheSMLjusttotherightofthemarketreturn.
e.abovetheSMLjusttotherightofthemarketreturn.
21.Thecostofpreferredstock:
a.decreaseswhenafirm'staxrateincreases.
b.isconstantovertime.
c.isunaffectedbychangesinthepriceofthestock.
d.isequaltothestock'sdividendyield.
e.increasesasthepriceofthestockincreases.
22.Lastweek,Lester'sElectronicspaidanannualdividendof$2.10onitscommon
stock.Thecompanyhasalongstandingpolicyofincreasingitsdividendby3percent
annually.Thispolicyisexpectedtocontinue.Whatisthefirm'scostofequityifthestock
iscurrentlysellingfor$44.60ashare?
a.7.66percent
b.7.71percent
c.7.79percent
d.7.85percent
e.7.90percent

23.ThecommonstockofBywater,Inc.has16percentlesssystematicriskthanthe
overallmarket.Currently,themarketriskpremiumis8.6percentwhiletheU.S.Treasury
billisyielding5.2percent.WhatisBywater,Inc.'scostofequity?
a.8.06percent
b.9.38percent
c.10.78percent
d.12.42percent
e.13.80percent
24.Junohas8percentbondsoutstandingthatmaturein19years.Thebondspayinterest
semiannuallyandhaveafacevalueof$1,000.Currently,thebondsaresellingfor$989
each.WhatisJuno'spretaxcostofdebt?
a.8.09percent
b.8.11percent
c.8.14percent
d.8.18percent
e.8.23percent
25.J&JMovershas40,000sharesofcommonstockoutstandingatapriceof$34ashare.
Italsohas4,000sharesofpreferredstockoutstandingatapriceof$58ashare.Thefirm
has9percent,10yearbondsoutstandingwithatotalfacevalueof$500,000.Thebonds
arecurrentlyquotedat96andpayinterestsemiannually.Whatisthecapitalstructure
weightofthefirm'sdebtifthetaxrateis34percent?
a.23.17percent
b.25.68percent
c.25.94percent
d.27.18percent
e.28.46percent
26.BrownStreetGrocershasacostofequityof14.4percent,apretaxcostofdebtof8.7
percent,andataxrateof34percent.Whatisthefirm'sweightedaveragecostofcapitalif
thedebtequityratiois.55?
a.9.64percent
b.10.28percent
c.10.65percent
d.11.33percent
e.12.38percent

PRACTICETESTANSWERS
1.D.

14.A.

2.C.

15.E.

3.B.

16.A.

4.E.

17.D.

5.C.

18.B.

6.B.

19.D.

7.C.

20.D.

8.B.

21.D.

9.C.

22.D.

10.E

23.D.

11.B.

24.B.

12.D.

25.A.

13.C.

26.D.