1,Donald Gilmore has $100,000 invested in a 2-stock portfolio. $25,000 is invested in Stock X and the remainder is invested in Stock Y. X’s beta is 1.50 and Y’s beta is 0.70. What is the portfolio’s beta?
Select the correct answer.
a. 0.80
b. 0.85
c. 0.95
d. 1.00
e. 0.90
2, Zacher Co.’s stock has a beta of 1.48, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm’s required rate of return?
Select the correct answer.
a. 12.09%
b. 12.19%
c. 12.39%
d. 12.29%
e. 12.49%
3, Porter Plumbing’s stock had a required return of 15.00% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm’s beta remain unchanged. What is the company’s new required rate of return?
Select the correct answer.
a. 19.00%
b. 18.10%
c. 18.40%
d. 18.70%
e. 19.30%
4, Stock A’s stock has a beta of 1.30, and its required return is 13.00%. Stock B’s beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B’s stock?
Select the correct answer.
a. 9.90%
b. 9.97%
c. 9.83%
d. 10.04%
e. 10.11%
5, Fiske Roofing Supplies’ stock has a beta of 1.23, its required return is 11.00%, and the risk-free rate is 4.30%. What is the required rate of return on the market?
Select the correct answer.
a. 9.75%
b. 9.59%
c. 9.63%
d. 9.67%
e. 9.71%
6, Kenny Electric Company’s noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm’s tax rate is 25%, what is the component cost of debt for use in the WACC calculation?
a. 5.44%
b. 6.67%
c. 6.35%
d. 5.73%
e. 6.03%
7, Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company’s cost of preferred stock for use in calculating the WACC?
a. 9.08%
b. 8.72%
c. 10.22%
d. 9.82%
e. 9.44%
8, •
•
When working with the CAPM, which of the following factors can be determined with the most precision?
a. The beta coefficient, bi, of a relatively safe stock.
b. The market risk premium (RPM).
c. The expected rate of return on the market, rM.
d. The beta coefficient of “the market,” which is the same as the beta of an average stock.
e. The most appropriate risk-free rate, rRF.
9, Bartlett Company’s target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using reinvested earnings is 12.75%. The firm will not be issuing any new stock. You were hired as a consultant to help determine their cost of capital. What is its WACC?
a. 9.83%
b. 9.54%
c. 8.98%
d. 10.12%
e. 9.26%
10, Avery Corporation’s target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from reinvested earnings is 11.25%, and the tax rate is 25%. The firm will not be issuing any new common stock. What is Avery’s WACC?
a. 9.19%
b. 8.83%
c. 9.94%
d. 8.49%
e. 9.55%
