A) 7.86% B) 9.43% C) 8.17% D) 4.67% E) 5.90% 133) What is the expected return on a portfolio that is equally weighted between Stocks M and N given the following information? State of Economy Probability of State Rate of Return if State Occurs of Econdmy Stock M Stock N Boom .13 .18 .14 Normal .82 .06 .06 Recession .05 .14 .18 A) 5.28% B) 5.87% C) 60096 D) 6.32% E) 6.40% 134) What is the expected return on a portfolio comprised of $9,750 of Stock X and $4,520 of Stock Y if the economy enjoys a boom period? State of Economy Probability of State Rate of Return if State Occurs of Econcmy Stock x Stock Y Boom .25 .108 .156 Normal .65 .087 .097 Recession .10 .024 .069 Version 1 50 A) 9.99% B) 11.42% C) 10.35% D) 9.78% E) 11.01% 155) Consider the following information: State of Economy Probability of State of Rate of Return if State Economy Occurs Stock A Stock B Recession .04 .097 .102 Normal .72 .114 .133 Boom .24 .156 .148 The market risk premium is 7.4 percent, and the risk-free rate is 3.1 percent. The beta of Stock A is and the beta of Stock B is A) 1.25; 1.89 B) 1.47; 1.76 C) 1.21; 1.76 D) 1.47; 1.41 E) 1.25; 1.41 156) When evaluating any capital project proposal, the cost of capital: Version 1 59 A) is determined by the overall risk level of the firm. B) is dependent upon the source of the funds obtained to fund that project. C) is dependent upon the firm's overall capital structure. D) should be applied as the discount rate for all other projects considered by the rm. E) depends upon how the funds raised for that project are going to be spent. 157) When determining a rm's cost of capital, the most important determinant is the: A) debt-equity ratio of any new funds raised. B) marginal tax rate. C) pretax cost of equity. D) aftertaX cost of equity. E) use of the funds raised. 158) To determine a firm's cost of capital, one must include: A) only the return required by the firm's current shareholders. B) only the current market rate of return on equity shares. C) the weighted costs of all future funding sources. D) the returns currently required by both debtholders and stockholders. E) the company's original debt-equity ratio. 159) Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity? Version 1 60 A) A decrease in the dividend amount B) An increase in the dividend amount C) An increase in the market rate of return D) A decrease in the rm's beta E) A decrease in the risk-free rate 160) Assume a firm utilizes the security market line approach to determine the cost of equity. If the rm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the rm's cost of equity? A) A decrease in the dividend amount B) An increase in the dividend amount C) A decrease in the market rate of return D) A decrease in the firm's beta E) A decrease in the risk-free rate 161) Assume afirm has a debt-equity ratio of .48. The firm's cost of equity is: A) generally less than its WACC. B) unaffected by changes in the market risk premium. C) directly related to the risk level of the firm. D) generally less than the firm's aftertaX cost of debt. E) inversely related to changes in the level of ination. 162) Assume afirm has a debt-equity ratio of .36. The firm's cost of equity: Version 1 61 163) A) tends to remain static even as the company's level of risk increases. B) increases as the unsystematic risk of the company's stock increases. C) is affected by both a change in the firm's beta and the firm's projected rate of growth. D) equals the risk-free rate plus the market risk premium. E) equals the company's pretax weighted average cost of capital. Which of the following is the main advantage of using the dividend growth model to estimate a rm's cost of equity? 164) A) The ability to apply either current or future taX rates. B) The model's applicability to all corporations. C) The model's consideration of risk. D) The stability of the computed cost of equity over time. E) The simplicity ofthe model. Which of the following statements is accurate regarding the dividend growth model? A) It is only as reliable as the estimated rate of growth. B) It can only be used if historical dividend information is available. C) It considers the risk that future dividends may vary from their estimated values. D) It applies only when a company is currently paying dividends. E) It is based solely on historical dividend information. 165) Assume Barnes' Boots has a debt-equity ratio of .52. The rm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm's estimated cost of equity: Version 1 62 A) is affected by the rm's rate of growth projections. B) implies that the rm pays out all of its earnings to its shareholders. C) is dependent upon a reliable estimate of the market risk premium. D) would be unaffected if the dividend discount model were applied instead. E) will be unaffected by changes in overall market risks. 166) When utilizing the capital asset pricing model approach to value equity, the outcome: A) is dependent upon the unsystematic risk of a security. B) assumes the reward-to-risk ratio increases as beta increases. C) can only be applied to dividend-paying rms. D) assumes a rm's future risks will be higher than its current risks. E) assumes the reward-to-risk ratio is constant. 167) Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the: A) dividend yield. B) cost of equity. C) capital gains yield. D) cost of capital. E) income return. 168) Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the: Version 1 63 A) compound rate. B) current yield. C) cost of debt. D) capital gains yield. E) cost of capital. 169) Which of the following statements regarding a firm's pretax cost of debt is accurate? A) It is based on the current yield to maturity of the company's outstanding bonds. B) It is equal to the coupon rate on the latest bonds issued by the company. C) It is equivalent to the average current yield on all of a company's outstanding bonds. D) It is based on the original yield to maturity on the latest bonds issued by a company. E) It must be estimated as it cannot be directly observed in the market. 170) A rm's aftertax cost of debt will increase if there is a(n): A) decrease in the company's debt-equity ratio. B) decrease in the company's tax rate. C) increase in the credit rating of the company's bonds. D) increase in the company's beta. E) decrease in the market rate of interest. 171) Which of the following statements regarding the aftertax cost of debt is accurate? Version 1 64 A) It varies inversely with changes in market interest rates. B) It will generally exceed the cost of equity if the relevant taX rate is zero. C) It will generally equal the cost of preferred stock if the tax rate is zero. D) It is unaffected by changes in the market rate of interest. E) It is highly dependent upon a company's tax rate. 172) When calculating a firm's weighted average cost of capital, the capital structure weights: A) are based on the book values of debt and equity. B) are based on the market values of the outstanding securities. C) depend upon the nancing obtained to fund each specific project. D) remain constant over time unless new securities are issued or outstanding securities are redeemed. E) are restricted to debt and common stock. 173) Which of the following statements regarding the weighted average cost of capital is ac curate ? A) It equals the aftertaX cost of the outstanding liabilities. B) It should be used as the required return when analyzing any new project. C) It is the return investors require on the total assets of the rm. D) It remains constant when the debt-equity ratio changes. E) It is unaffected by changes in corporate taX rates. 174) The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a dividend payout ratio of 24 percent, has abeta of 1.08, and has an income tax rate of 21 percent. Given this information, which one of the following statements is accurate? Version 1 65 A) The aftertax cost of debt will be greater than the current yield to maturity on the company's outstanding bonds. B) The company's cost of preferred is most likely less than the company's actual cost of debt. C) The cost of equity is unaffected by a change in the company's tax rate. D) The cost of equity can be estimated only by using the capital asset pricing model. E) The weighted average cost of capital will remain constant as long as the company's capital structure remains constant. 175) When determining a rrn's weighted average cost of capital, the item with the least amount of impact is the: A) company's beta. B) coupon rate of the company's outstanding bonds. C) growth rate of the company's dividends. D) company's marginal tax rate. E) standard deviation of the company's common stock. 176) Assume afirm has a debt-equity ratio of .62. The rm's weighted average cost of capital is the: A) discount rate that the rm should apply to all of the projects it undertakes. B) rate of return a company must earn on its existing assets to maintain the current value of its stock. C) coupon rate the firm should expect to pay on its next bond issue. D) minimum discount rate the rm should require on any new project. E) rate of return debtholders should expect to earn on their investment in this rm. Version 1 66 177) Assume afirm employs debt in its capital structure. Which of the following statements is ac curate ? A) The WACC would most likely decrease if the rm replaced its preferred stock with debt. B) In the WACC calculation, the weight assigned to preferred stock decreases as the market value of the preferred stock increases. C) The WACC will decrease as the corporate tax rate decreases. D) In the WACC calculation, the weight of equity is based on the number of shares outstanding and the book value per share. E) The WACC will remain constant unless a company retires some of its debt. 178) Montez Supply is expected to pay an annual dividend of $.95 per share next year. The market price of the stock is $43.50 and the growth rate is 4.5 percent. What is the cost of equity? A) 2.28% B) 6.68% C) 8.69% D) 6.78% E) 2.18% 179) The Shoe Outlet has paid annual dividends of $.58, $.66, $.72, and $.75 per share over the last four years, respectively. The stock is currently selling for $10.08 per share. What is the cost of equity? A) 18.74% B) 17.13% C) 10.38% D) 19.53% E) 11.79% Version 1 67 180) Castillo Corporation common stock is currently priced at $39.75 per share. The company just paid $4.35 per share as its annual dividend. The dividends have been increasing by 7.5 percent annually and are expected to continue doing the same. What is the cost of equity? A) 19.26% B) 8.25% C) 18.44% D) 10.92% E) 11.74% 181) The common stock of Metal Molds has anegative growth rate of 1.63 percent and a required return of 18.21 percent. The current stock price is $9.82. What was the amount of the last dividend paid? A) $1.07 B) $2.11 C) $1.64 D) $1.73 E) $1.98 182) Highway Express has paid annual dividends of $1.32, $1.33, $1.38, $1.40, and $1.42 over the past ve years, respectively. What is the average dividend growth rate? A) 1.85% B) 2.16% C) 1.98% D) 2.47% E) 2.39% Version 1 68 A) 11.93% B) 11.67% C) 12.55% D) 12.78% E) 12.32% 135) What is the beta of the following portfolio? Stock Amount Invested Security Beta A $6,000 1.37 13 $17,900 .95 C $2,750 1.48 A) 1.10 B) 1.49 C) 1.27 D) 1.54 E) 1.40 136) Your portfolio is comprised of 22 percent of Stock X, 32 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.04, Stock Y has a beta of .96, and Stock Z has a beta of 1.24. What is the beta of your portfolio? A) 1.163 B) 1.092 C) 1.127 D) 1.178 E) 1.106 Version 1 51 183) Kelley Couriers just paid its annual dividend of $5.25 per share. The stock has a market price of $58.25 and a beta of 1.2. The return on the U.S. Treasury bill is 1 percent and the market risk premium is 8.5 percent. What is the cost of equity? A) 8.8% B) 10.0% C) 10.2% D) 8.5% E) 11.2% 184) National Home Rentals has a beta of 1.06, a stock price of $17, and recently paid an annual dividend of $.92 per share. The dividend growth rate is 2.2 percent. The market has a rate of return of 11.2 percent and a risk premium of 7.3 percent. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model? A) 10.05% B) 8.67% C) 9.13% D) 10.30% E) 9.68% 185) Gabaldon Group has a stock price of $48.75, a beta of 1.3, and just paid an annual dividend of $1.25 per share. The dividend growth rate is expected to be 6.5 percent per year. What is the estimated cost of equity using the dividend discount model? A) 9.06% B) 2.56% C) 2.73% D) 9.23% E) 12.00% Version 1 69 186) More by Moore has a growth rate of 4.3 percent and its stock is currently selling for $31.88 per share. It is equally as risky as the market. The stock market has an expected return of 13 percent and an expected market risk premium of 11.55 percent. What is the expected rate of return on the stock? A) 13.00% B) 14.45% C) 28.30% D) 11.55% E) 12.23% 187) Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent and the risk-free rate of return is 2.9 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.18? A) .14% B) 28% C) 26% D) .12% E) .43% 188) Nguyen Corporation's common stock has a beta of 1.38. The risk-free rate is 1.78 percent and the expected return on the market is 14.6 percent. What is the cost of equity? A) 20.15% B) 22.51% C) 17.69% D) 19.47% E) 21.93% Version 1 70 189) Stock in Country Road Industries has a beta of 1.62. The market risk premium is 8.2 percent While T-bills are currently yielding 2.9 percent. Country Road's last paid annual dividend was $1. 87 per share and dividends are expected to grow at an annual rate of 3.8 percent indefinitely. The stock sells for $25 per share. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model? A) 13.87% B) 14.06% C) 14.23% D) 13.38% E) 14.50% 190) Decline, Incorporated, is trying to determine its cost of debt. The rm has a debt issue outstanding with 13 years to maturity that is quoted at 105.2 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the aftertax cost of debt if the tax rate is 21 percent? A) 4.30% B) 4.92% C) 4.17% D) 5.43% E) 5.58% 191) Jiminy's Cricket Farm issued a 20-year, 7 percent, semiannual bond four years ago. The bond currently sells for 108 percent of its face value. What is the aftertaX cost of debt if the company's combined tax rate is 23 percent? Version 1 71 A) 4.96% B) 4.78% C) 4.15% D) 4.12% E) 3.86% 192) Ahmad Couture has bonds outstanding with a face value of $1,000, 11 years to maturity, and a coupon rate of 6 percent paid semiannually. What is the company's pretax cost of debt if the bonds currently sell for $1,067.12? A) 2.60% B) 5.34% C) 2.67% D) 5.19% E) 4.60% 193) Espy Hotels has bonds outstanding that mature in 9 years, pay interest semiannually, and have a coupon rate of 5.5 percent. These bonds have a face value of $1,000 and a current market price of $989.28. What is the company's aftertax cost of debt if its tax rate is 22 percent? A) 5.61% 13) 2.19% C) 4.37% D) 5.65% E) 4.41% 194) Patel & Howell has zero coupon bonds outstanding that mature in 4 years. The bonds have a face value of $1,000 and a current market price of $798. What is the pretax cost of debt? (Use semiannual compounding.) Version 1 72 A) 6.55% B) 5.91% C) 5.72% D) 6.31% E) 6.48% 195) Gould Design has $1,000 face value bonds outstanding with 17 years to maturity, a coupon rate of 5 percent, semiannual interest payments, and a current price of $987.78. What is the aftertax cost of debt if the tax rate is 21 percent? A) 4.04% B) 5.09% C) 2.01% D) 4.02% E) 5.11% 196) Lichtenfeld has a bond issue outstanding that matures in 19 years. The bonds pay interest semiannually. The bonds have a face value of $1,000 and are currently priced at $995.28. The bonds carry a coupon rate of 3.5 percent. What is the aftertaX cost of debt if the total tax rate is 22 percent? A) 2.76% B) 3.53% C) 1.38% D) 2.75% E) 3.28% Version 1 73 197) The outstanding bonds of Harden Fitness are priced at $1,014.66 and mature in 5 years. These bonds have a face value of $1,000, a coupon rate of 4.5 percent, and pay interest semiannually. The tax rate is 21 percent. What is the aftertaX cost of debt? A) 4.37% B) 1.72% C) 3.45% D) 4.17% E) 3.30% 198) Simple Foods has a zero coupon bond issue outstanding that matures in 14 years. The bonds are selling at 56 percent of par value. What is the company's aftertaX cost of debt if the combined taX rate is 23 percent? (Use semiannual compounding.) A) 4.48% B) 3.13% C) 3.22% D) 3.73% E) 2.88% 199) Theresa's Flower Garden has 650 bonds outstanding that are selling for $1,007 each, 2,100 shares of preferred stock with a market price of $68 per share, and 42,000 shares of common stock valued at $44 per share. What weight should be assigned to the preferred stock when computing the weighted average cost of capital? A) 6.08% B) 5.40% C) 6.67% D) 5.00% E) 5.75% Version 1 74 200) Florida Groves has a $380,000 bond issue outstanding that is selling at 97.4 percent of face value. The firm also has 2,600 shares of preferred stock valued at $61 per share and 37,500 shares of common stock valued at $19 per share. What weight should be assigned to the common stock when computing the weighted average cost of capital? A) 55.75% B) 62.20% C) 58.75% D) 61.03% E) 57.40% 201) The Downtowner has 168,000 shares of common stock outstanding valued at $53 per share along with 13,000 bonds selling for $1,008 each. What weight should be given to the debt when the company computes its weighted average cost of capital? A) 46.67% B) 65.05% C) 51.79% D) 59.54% E) 48.27% 202) Phillips Equipment has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with similar characteristics are yielding 6.7 percent, pretax. The company also has 48,000 shares of 5.5 percent preferred stock and 75,000 shares of common stock outstanding. The preferred stock sells for $64 per share. The common stock has a beta of 1.32 and sells for $41 per share. The preferred stock has a stated value of $100. The US. Treasury bill is yielding 2.2 percent and the return on the market is 10.6 percent. The corporate tax rate is 21 percent. What is the weighted average cost of capital? Version 1 75 A) 8.09% B) 8.64% C) 10.18% D) 9.30% E) 10.56% 203) Wayco Industrial Supply has a pretax cost of debt of 8.3 percent, a cost of equity of 14.7 percent, and a cost of preferred stock of 8.9 percent. The firm has 165,000 shares of common stock outstanding at a market price of $33 per share. There are 15,000 shares of preferred stock outstanding at a market price of $43 per share. The bond issue has a face value of $750,000 and a market quote of 101. The company's tax rate is 21 percent. What is the weighted average cost of capital? A) 12.18% B) 10.84% C) 14.32% D) 12.60% E) 13.25% 204) Central Systems desires a weighted average cost of capital of 12.7 percent. The firm has an aftertaX cost of debt of 4.8 percent and a cost of equity of 15.4 percent. What debt-equity ratio is needed for the rm to achieve its targeted weighted average cost of capital? A) .37 B) .42 C) .56 D) .34 E) .44 Version 1 76 205) Mullineaux Corporation has a target capital structure of 46 percent common stock, 5 percent preferred stock, and the balance in debt. Its cost of equity is 15.8 percent, the cost of preferred stock is 8.3 percent, and the aftertax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent? A) 9.89% B) 10.43% C) 11.02% D) 11.38% E) 12.17% 206) Cookie Dough Manufacturing has a target debt-equity ratio of .76. Its cost of equity is 15.3 percent, and its pretax cost of debt is 9 percent. What is the WACC given ataX rate of 21 percent? A) 11.76% B) 12.78% C) 13.11% D) 11.48% E) 12.53% 207) Rosa's has a weighted average cost of capital of 11.73 percent. The cost of equity is 15.8 percent and the pretax cost of debt is 7.6 percent. The tax rate is 21 percent. What is the target debt-equity ratio? Version 1 77 A) .89 B) 1.87 C) 1.41 D) .53 E) .71 208) Dee's Toys has atarget debt-equity ratio of .62. Its WACC is 11.3 percent and the tax rate is 21 percent. What is the cost of equity if the aftertaX cost of debt is 6.3 percent? A) 15.15% B) 15.04% C) 14.68% D) 14.79% E) 14.40% 209) Deep Mines has 43,800 shares of common stock outstanding with a beta of 1.54 and a market price of $51 per share. There are 10,000 shares of 7 percent preferred stock outstanding with a stated value of $100 per share and a market value of $83 per share. The 8 percent semiannual bonds have a face value of $1,000 and are selling at 96 percent of par. There are 5,000 bonds outstanding that mature in 13 years. The market risk premium is 7.5 percent, Tbills are yielding 3.6 percent, and the tax rate is 21 percent. What discount rate should the rm apply to a new project's cash ows if the project has the same risk as the company's typical project? A) 9.59% B) 8.72% C) 9.17% D) 8.28% E) 9.30% Version 1 78 137) Your portfolio has a beta of 1.24. The portfolio consists of 6 percent US. Treasury bills, 40 percent Stock A, and 54 percent Stock B. Stock A has a risk level equivalent to that of the overall market. What is the beta of Stock B? A) 1.44 B) 1.52 C) 1.56 D) 1.84 E) 1.96 138) You would like to combine a risky stock with a beta of 1.48 and US. Treasury bills in such a way that the risk level of the portfolio will be equivalent to the risk level of the overall market. What percentage of the portfolio should you invest in the risky stock? A) 63.32% B) 65.79% C) 67.57% D) 56.8% E) 52.0% 139) You own a portfolio equally invested in a risk-free asset and two different stocks. One of the stocks has a beta of 1.32. The total portfolio is equally as risky as the market. What is the beta of the second stock? Version 1 52 210) AZ Products has 140,000 shares of common stock outstanding at a market price of $27 per share. Next year's annual dividend is expected to be $1.43 per share and the dividend growth rate is 2 percent. The company also has 2,500 bonds outstanding with a face value of $1,000 per bond. The bonds have a pretax yield of 7.35 percent and sell at 98.2 percent of face value. The company's tax rate is 21 percent. What is the weighted average cost of capital? A) 8.41% B) 6.71% C) 7.52% D) 6.58% E) 6.59% 211) Kelso's has a debt-equity ratio of .62 and atax rate of21 percent. The rm does not issue preferred stock. The cost of equity is 16.3 percent and the aftertax cost of debt is 5.21 percent. What is the weighted average cost of capital? A) 10.96% B) 11.67% C) 12.06% D) 11.38% E) 11.57% 212) Granite Works maintains a debt-equity ratio of .58 and has atax rate of 21 percent. The pretax cost of debt is 8.9 percent. There are 18,000 shares of stock outstanding with a beta of 1.42 and a market price of $23 per share. The current market risk premium is 7.8 percent and the current risk-free rate is 3.1 percent. This year, the rm paid an annual dividend of $1.68 per share and expects to increase that amount by 2 percent each year. Using an average expected cost of equity, what is the weighted average cost of capital? Version 1 79 A) 8.44% B) 9.78% C) 8.96% D) 9.13% E) 10.06% 213) Delta Lighting has 24,500 shares of common stock outstanding at a market price of $19 per share. This stock was originally issued at $21 per share. The rm also has a bond issue outstanding with a total face value of $250,000 which is selling for 94 percent of par. The cost of equity is 12.6 percent while the aftertax cost of debt is 5.8 percent. The rm has a beta of 1.33 and ataX rate of 23 percent. What is the weighted average cost of capital? A) 10.07% B) 10.32% C) 12.36% D) 11.29% E) 11.47% Version 1 80 A) 1.46 B) .88 C) 1.94 D) 1.68 E) 1.54 140) You want your portfolio beta to be .95. Currently, your portfolio consists of $4,000 invested in Stock A with a beta of 1.26 and $7,000 in Stock B with a beta of .94. You have another $8,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset? A) $3,966 B) $4,425 C) $4,902 D) $4,305 E) $5,083 141) You have a $15,000 portfolio which is invested in Stocks A and B, and ariskfree asset. $6,000 is invested in Stock A. Stock A has a beta of 1.63 and Stock B has a beta of .95. How much needs to be invested in Stock B if you want a portfolio beta of 1.10? A) $8,998.90 B) $8,333.33 C) $7,706.20 D) $7,073.68 E) $9,419.27 Version 1 53 142) A stock has a beta of 1.08 and an expected return of 13.2 percent. A risk-free asset currently earns 1.2 percent. The beta of a portfolio comprised of these two assets is .94. What percentage of the portfolio is invested in the stock? A) 68% B) 87% C) 63% D) 72% E) 84% 143) The market has an expected rate of return of 6.50 percent. A long-tenn government bond is expected to yield 3.4 percent and a US. Treasury bill is expected to yield 2.25 percent. The ination rate is 2.15 percent. What is the market risk premium? A) .50% B) 5.02% C) 4.25% D) 5.32% E) 3.60% 144) The risk-free rate of return is 3.5 percent, the ination rate is 2.9 percent, and the market risk premium is 7.5 percent. What is the expected rate of return on a stock with a beta of 1.43? A) 4.6% B) 11% C) 14.2% D) 13.1% E) 8.7% Version 1 54 145) The stock of Yakir Development has a beta of 1.31. The risk-free rate of return is 1.5 percent and the market rate of return is 8 percent. What is the risk premium on this stock? A) .9% B) 8.5% C) 6.5% D) 6.7% E) 5.0% 146) The common stock of Xiang Estates has an expected return of 13.3 percent. The expected return on the market is 10 percent, the ination rate is 1.4 percent, and the risk-free rate of return is 1.3 percent. What is the beta of this stock? A) 1.38 B) 1.23 C) 1.33 D) 1.41 E) 1.55 147) Suppose the common stock of McLaughlin Corporation has a beta of 1.35 and an expected return of 11.05 percent. The risk-free rate of return is 3.25 percent while the ination rate is 2.8 percent. What is the expected market risk premium? Version 1 55 A) 8.52% B) 2.98% C) 9.03% D) 5.78% E) 4.55% 148) The expected return on Cerrato, Incorporated, stock is 16.28 percent While the expected return on the market is 11.97 percent. The stock's beta is 1.63. What is the risk-free rate of return? A) 2.22% B) 4.31% C) 2.42% D) 4.50% E) 5.13% 149) The stock of Rullo Rigs has a beta of 1.34. The risk-free rate of return is 1.9 percent, the ination rate is 2.2 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on this stock? A) 2.8% B) 8.8% C) 11.1% D) 9.4% E) 8.6% Version 1 56 150) The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information? A) The actual expected stock return will graph above the security market line. B) The stock is currently underpriced. C) To be correctly priced according to CAPM, the stock should have an expected return of 13.56 percent. D) The stock has less systematic risk than the overall market. E) The actual expected stock return indicates the stock is currently overpriced. 151) Which one of the following stocks is correctly priced according to CAPM if the risk-free rate of return is 3.4 percent and the market risk premium is 7.4 percent? Stock Beta Expected Return A .87 .096 .3 1.09 .102 C 1.62 .146 3 .98 .107 3 1.16 .139 A) A B) B C) C D) D E) E 152) Which one of the following stocks is correctly priced if the risk-free rate of return is 2.84 percent and the market rate of return is 10.63 percent? Version 1 57 Stock Beta Expected Return A .93 .0892 3 1.18 .1203 C 1.47 .1540 D 1.02 .1006 3 1.26 .1187 A) A B) B C) c D) D E) E 153) A stock has an expected return of 6.5 percent, the risk-free rate is 1.1 percent, and the market risk premium is 5 percent. What is the stock's beta? A) 1.08 B) .98 C) 1.12 D) .96 E) 1.06 154) Suppose you observe the following situation: Security Beta. Expected Return A l . l 6 . 1 137 B . 9 2 . O 98 4 Assume these securities are correctly priced. Based on the CAPM, What is the return on the market? Version 1 58