Question

QUESTION 11

1. Make sure your calculator settings are at 4 decimals. Remember to clear out the cash flow register for each problem. Thanks for a great semester :) (mark true)

   True

   False

10 points (Extra Credit)   

QUESTION 12

1. Which of the following are true regarding the Market Risk Premium

   		A. it is the intercept of the security market line
   		B. It is the difference between the market rate of return and the risk free rate
   		C. It tells us the extent to which a particular investment's returns vary with the market portfolio
   		A and C
   		B and C
   		A and B
   		A, B, and C

10 points   

QUESTION 13

1. A share of common stock just paid a dividend of $2.23.  If the expected long-run growth rate for this stock is 5% and if the beta for the stock is 1.25, what is the value of the stock? Assume the risk free rate is 3% and the market rate of return is 12%.  

   		24.10
   		25.31
   		7.31
   		7.26
   		21.37
   		33.45
   		31.85

10 points   

QUESTION 14

1. Sort the following from smallest(1) to largest(4)

         -       1.       2.       3.       4.      

   cost of new common equity issuance

   
         -       1.       2.       3.       4.      

   cost of preferred stock

   
         -       1.       2.       3.       4.      

   after-tax cost of debt

   
         -       1.       2.       3.       4.      

   cost of retained earnings

10 points   

QUESTION 15

1. The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

   True

   False

Answer 1

Ans 12) Correct answer is 2nd option because 1st statement is false because risk free rate is the intercept of the slope.

A&C is incorrect because risk free rate is the intercept of the slope.

B & C is correct.

A & B is incorrect because risk free rate is the intercept of the slope.

A , B & C is incorrect because risk free rate is the intercept of the slope.

Ans 13) We will find the stock price using dividend discount model

stock price = current dividend * (1 + growth rate)/(return on equity - growth rate)

retun on equity = risk free rate + beta * (market return - risk free rate)

= 3% + 1.25 * 9%

= 14.25%

stock price = $2.23 * (1.05)/(.1425 - .05)

= $25.31

Ans 14) Cost of new equity issuance is 4

Cost of preferred stock is 2

After tax Cost of debt is 1

Cost of retained earning is 3

Ans 15) The given statement is true because any investment done for the profit and one can calculate it by discouting to the future cash flow at a discount rate.