THE JSU CORPORATION\'S COMMON STOCK HAS A BETA OF 1.75. THE REQUIRED RETURN ON T
ID: 2623288 • Letter: T
Question
THE JSU CORPORATION'S COMMON STOCK HAS A BETA OF 1.75. THE REQUIRED RETURN ON THE MARKET PORTFOLIO IS 10% AND THE RISK-FREE RATE IS 6%. THE STOCK JUST PAID A DIVIDEND OF $1.50 WHICH IS EXPECTED TO GROW AT A CONSTANT RATE OF 6% FOREVER. ACCORDING TO THE CONSTANT GROWTH MODEL, A FAIR PRICE FOR THIS STOCK WOULD BE _______.
$32.89
$19.75
$22.71
$20.52
AN INCREASE IN A STOCK'S BETA WILL CAUSE THE STOCK'S ___________ TO RISE.
INFLATION PREMIUM
MARKET RISK PREMIUM
PRICE
REQUIRED RETURN AND SECURITY RISK PREMIUM
THE PREFERRED STOCK OF THE GAMECOCK CORPORATION JUST PAID A DIVIDEND OF $2 AND ITS CURRENT PRICE IS $25. THE REQUIRED RETURN ON THIS STOCK MUST BE _______.
6%
10%
12%
8%
A CHANGE IN A PROJECT'S REQUIRED RETURN (AKA DISCOUNT RATE) WILL CHANGE ITS _____________.
I. PAYBACK PERIOD
II. NET PRESENT VALUE
III. INTERNAL RATE OF RETURN
IV. PROFITABILITY INDEX
I AND III
II AND IV
I, III AND IV
II, III AND IV
THE FIN 301 CORPORATION JUST PAID A $1 DIVIDEND. THE FIRM'S RETURN ON EQUITY IS 20% AND ITS RETENTION RATIO IS .40. THE REQUIRED RETURN ON THE STOCK IS 12%. ACCORDING TO THE CONSTANT GROWTH MODEL, A FAIR PRICE FOR THIS STOCK WOULD BE _______.
$25
$27
$21
$29
INVESTING IN A DIVERSIFIED PORTOLIO REDUCES _________ RISK.
SYSTEMATIC
UNSYSTEMATIC
MARKET
INFLATION
AN INCREASE IN A SECURITY'S BETA WILL CAUSE ITS _______ TO RISE.
UNSYSTEMATIC RISK
MARKET RISK PREMIUM
FIRM-SPECIFIC RISK
SECURITY RISK PREMIUM
THE HIGHER A CAPITAL BUDGETING PROJECT'S NET PRESENT VALUE IS, THE HIGHER ITS ________ WILL BE.
I. PAYBACK PERIOD
II. INTERNAL RATE OF RETURN
III. PROFITABILITY INDEX
III ONLY
II ONLY
I ONLY
I, II AND III
WHICH OF THE FOLLOWING WILL CAUSE AN INCREASE IN THE PRICE OF A SHARE OF COMMON STOCK?
I. AN INCREASE IN BETA
II. A DECREASE IN BETA
III. AN INCREASE IN THE RISK-FREE RATE
IV. A DECREASE IN THE RISK-FREE RATE
V. AN INCREASE IN THE DIVIDEND GROWTH RATE
VI. A DECREASE IN THE DIVIDEND GROWTH RATE
I ONLY
I AND III
I, III AND VI
II, IV AND V
CONSIDER THE FOLLOWING INFORMATION:
A
10%
3
.75
B
15%
2
2.00
C
20%
1
1.50
SECURITY ______ HAS THE MOST STAND-ALONE RISK AND SECURITY ______ HAS THE MOST SYSTEMATIC RISK.
C; C
C; A
A; B
B; C
THE MARKET RISK PREMIUM JUST ROSE. THIS MUST MEAN _______
ALL SECURITIES' SYSTEMATIC RISK JUST ROSE.
MOST SECURITIES' REQUIRED RETURNS JUST ROSE.
ALL SECURITIES' BETAS JUST ROSE.
ALL SECURITIES' UNSYSTEMATIC RISK JUST ROSE
CONSIDER THE CASH FLOWS FOR MUTUALLY EXCLUSIVE PROJECTS X AND Y SHOWN IN THE FOLLOWING TABLE:
IF THE REQUIRED RETURN (AKA DISCOUNT RATE) FOR BOTH PROJECTS IS 10%, THEN PROJECT ______ SHOULD BE SELECTED BECAUSE _______.
Y BECAUSE ITS IRR IS HIGHER THAN THAT OF X
X; BECAUSE ITS NPV IS HIGHER THAN THAT OF Y
Y BECAUSE ITS NPV IS HIGHER THAN THAT OF X
X; BECAUSE ITS IRR IS HIGHER THAN THAT OF Y
$32.89
$19.75
$22.71
$20.52
Explanation / Answer
r = 6% + 1.75*(10%-6%) = 13.00%
FAIR PRICE FOR THIS STOCK WOULD BE = 1.5*1.06/(13%-6%) = $22.71
$22.71
REQUIRED RETURN AND SECURITY RISK PREMIUM
REQUIRED RETURN ON THIS STOCK = 2/25= 8%
8%
I. PAYBACK PERIOD
II. NET PRESENT VALUE
III. INTERNAL RATE OF RETURN
IV. PROFITABILITY INDEX
II AND IV
G=ROE x (1 - dividend-payout ratio)
G= 20%*(1-60%)= 8.00%
FAIR PRICE FOR THIS STOCK=1*1.08/(12%-8%)= $27
$27
UNSYSTEMATIC
FIRM-SPECIFIC RISK
III ONLY
I. AN INCREASE IN BETA
II. A DECREASE IN BETA
III. AN INCREASE IN THE RISK-FREE RATE
IV. A DECREASE IN THE RISK-FREE RATE
V. AN INCREASE IN THE DIVIDEND GROWTH RATE
VI. A DECREASE IN THE DIVIDEND GROWTH RATE
II, IV AND V
SECURITY
STANDARD DEVIATION OF RETURNS
COEFFICIENT OF VARIATION
BETA
A
10%
3
.75
B
15%
2
2.00
C
20%
1
1.50
A; B
ALL SECURITIES' SYSTEMATIC RISK JUST ROSE.
TIME
PROJECT X
PROJECT Y
0
-$1,000,000
-$500,000
1
$500,000
$300,000
2
$500,000
$300,000
3
$400,000
$300,000
4
$400,000
$300,000
5
$300,000
$200,000
X; BECAUSE ITS NPV IS HIGHER THAN THAT OF Y
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