1129 words - 5 pages

Finance 316 practice problems for final exam

1. True or False: According to the CAPM, a stock's expected return is positively related to its beta.

2. In practice, the market portfolio is often represented by:

A. a portfolio of U.S. Treasury securities.

B. a diversified stock market index.

C. an investor's mutual fund portfolio.

D. the historic record of stock market returns.

3. A stock's beta measures the:

A. average return on the stock.

B. variability in the stock's returns compared to that of the market portfolio.

C. difference between the return on the stock and return on the market portfolio.

D. market risk premium on the stock.

4. If the slope of the line measuring a stock's ...view middle of the document...

After that, its

dividends are expected to grow at an annual rate of 4%. If the firm’s required return on equity is 11%,

then what must be its current stock price?

10. Consider two savings accounts that have the same effective annual rate. Account #1 pays 8.8% APR

compounded quarterly. Account #2 is compounded monthly. What is Account #2’s APR?

11. Your firm is thinking about purchasing a coal mining company. Suppose that the mining company’s

cash flows are expected to be -$50 million this year, $0 next year, +$20 million per year for the following

15 years, and then nothing after that. You may assume that the expected rate of return on the market

portfolio is 15%, the risk-free rate is 4%, and the corporate tax rate is 35%.

(a) What is the mining company’s current weighted average cost of capital if it is financed with 25% debt

and 75% equity, its equity has a beta of 0.75, and its debt has a beta of 0.1?

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Finance 316 practice problems for final exam

(b) Using your answer from part (a), what is the value of the mining company’s equity?

12. Campbell soup currently has a capital structure that consists of 70% equity and 30% debt. Its equity

has a beta of 0.5, and its debt has a beta of 0.1. You may assume that the risk-free rate is 5%, the

expected return on the market is 12%, and that the corporate tax rate is 40%. Use this information in

your answers to questions (a) and (b) below.

(a) What is Campbell Soup’s weighted average cost of capital (WACC)?

(b) You expect Campbell Soup to generate operating cash flows of $750 million per year for three years

(starting next year), and then $500 million per year in perpetuity thereafter. Using your answer to (a)

above, what is the most you should be willing to pay to acquire Campbell Soup (i.e., all of its debt and

equity)? (You may assume that Campbell Soup’s capital structure would remain unchanged after the

acquisition.)

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Finance 316 practice problems for final exam

13. One year ago, you bought a $1000 face value, 6% annual coupon bond...

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