MAS.

11 DIY Drill
Question 1
 Alex Timber Company hired your consulting firm to help them estimate the cost of
equity.  The yield on the firm's bonds is 8.75%, and your firm's economists believe that
the cost of equity can be estimated using a risk premium of 3.85% over a firm's own
cost of debt.  What is an estimate of the firm's cost of equity from retained earnings?
Response: 13.63%
Correct answer: 12.60%
Score: 0 out of 1 No

Question 2
 Assume that you are a consultant to Broske Inc., and you have been provided with the
following data:  D1 = P0.67; P0 = P27.50; and g = 8.00% (constant).  What is the cost of
equity from retained earnings?
Response: 9.91%
Correct answer: 10.44%
Score: 0 out of 1 No

Question 3
 The ____ is an absolute measure of risk, and the ____ is a relative measure of risk.
Response: standard deviation, coefficient of variation
Correct answer: standard deviation, coefficient of variation
Score: 1 out of 1 Yes

Question 4
 Roenfeld Corp believes the following probability distribution exists for its stock.  What is
the coefficient of variation on the company's stock?

State of the Probability of Stock's Expected

Economy Occurring Return
Boom 0.45 25%
Normal 0.50 15%
Recession 0.05 5%

Response: 0.3299
Correct answer: 0.3069
Score: 0 out of 1 No

Question 5
 Bae Inc. is considering an investment that has an expected return of 15% and a
standard deviation of 10%.  What is the investment's coefficient of variation?
Response: 0.73
Correct answer: 0.67
Score: 0 out of 1 No

Question 6
 A stock is expected to pay a year-end dividend of P2.00.  The dividend is expected to
decline at a rate of 5% a year forever (g = -5%).  If the company is in equilibrium and its
expected and required rate of return is 15%, which of the following statements is
correct?
Response: The constant growth model cannot be used because the growth rate is
negative.
Correct answer: The company’s expected stock price at the beginning of next year is
P9.50.
Score: 0 out of 1 No

Question 7
 Assume that you wish to purchase a 20-year bond that has a maturity value of P1,000
and makes semi-annual interest payments of P40.  If you require a 10 percent yield to
maturity on this investment, what is the maximum price you should be willing to pay for
the bond?
Response: P674
Correct answer: P828
Score: 0 out of 1 No

Question 8
 The minimum return that will make an investment acceptable to an investor is called
Response: the required rate of return.
Correct answer: the required rate of return.
Score: 1 out of 1 Yes

Question 9
 Russell Inc. is evaluating four independent investment proposals. The expected returns
and standard deviations for each of these proposals are presented below.
 Expected return Standard deviation
Investment I 16% 10%
Investment II 14% 10%
Investment III 20% 11%
Investment IV 22% 15%

Which one of the investment proposals has the least relative level of risk?
Response: Investment IV
Correct answer: Investment III
Score: 0 out of 1 No

Question 10
 The return on an investment in stock
Response: Has a standard deviation that has historically been small relative to its
average value.
Correct answer: Consists of dividend and capital gains yields.
Score: 0 out of 1 No

Question 11
 Which of the following securities would not be selected?
Response: Security C: Expected return: 11%, Standard deviation: 10%
Correct answer: Security B: Expected return: 10%, Standard deviation: 12%
Score: 0 out of 1 No

Question 12
 The ____ the standard deviation, the ____ the investment.
Response: larger, smaller the expected return on
Correct answer: larger, riskier
Score: 0 out of 1 No

Question 13
 Jim Angel holds a P200,000 portfolio consisting of the following stocks:

Stock Investment Beta

A P 50,000 0.95
 B 50,000 0.80
C 50,000 1.00
D 50,000 1.20
Total P200,000

What is the portfolio's beta?

Response: 1.037
Correct answer: 0.988
Score: 0 out of 1 No

Question 14
 Super Sounds is expecting a period of intense growth and has decided to retain more
of their earnings to help finance that growth. As a result, they are going to reduce the
annual dividend by 20 percent a year for the next three years. After that they will
maintain a constant dividend of P1 a share. Last year, the company paid P2.25 as the
annual dividend per share. What is the market value of this stock if the required rate of
return is 16 percent? 
Response: P8.08
Correct answer: P7.36
Score: 0 out of 1 No

Question 15
 A stock just paid a dividend of P1.50.  The expected rate of return is 10.1%, and the
constant growth rate is 4.0%.  What is the current stock price?
Response: P23.70
Correct answer: P25.57
Score: 0 out of 1