FIN 540 Week 6 Homework Problems – Strayer NEW
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Week 6
Homework Problems Chapter 25 and
26
1. For
markets to be in equilibrium (that is, for there to be no strong pressure for
prices to depart
from
their current levels),
a. The
past realized rate of return must be equal to the expected rate of return; that
is, .
b. The
required rate of return must equal the realized rate of return; that is, r = .
c. All
companies must pay dividends.
d. No
companies can be in danger of declaring bankruptcy.
e. The
expected rate of return must be equal to the required rate of return; that is,
= r.
2. In a
portfolio of three different stocks, which of the following could NOT be true?
a. The
riskiness of the portfolio is greater than the riskiness of one or two of the
stocks.
b. The
beta of the portfolio is less than the betas of each of the individual stocks.
c. The
beta of the portfolio is greater than the beta of one or two of the individual
stocks'
betas.
d. The
beta of the portfolio cannot be equal to 1.
e. The
riskiness of the portfolio is less than the riskiness of each of the stocks if
they were
held in
isolation.
3. You
have the following data on (1) the average annual returns of the market for the
past 5 years
and (2)
similar information on Stocks A and B. Which of the possible answers best
describes the
historical
betas for A and B?
Years
Market Stock A Stock B
1 0.03
0.16 0.05
2 − 0.05
0.20 0.05
3 0.01
0.18 0.05
4 − 0.10
0.25 0.05
5 0.06
0.14 0.05
a.
bA > +1; bB = 0.
b. bA = 0; bB
= − 1.
c.
bA < 0; bB = 0.
d.
bA < -1; bB = 1.
e.
bA > 0; bB = 1.
4. Which
of the following statements is CORRECT?
a. The
typical R2 for a stock is about 0.94 and
the typical R2 for a portfolio is about
0.6.
b. The
typical R2 for a stock is about 0.3 and
the typical R2 for a large portfolio is
about 0.94.
c. The
typical R2 for a stock is about 0.94 and
the typical R2 for a portfolio is also
about
0.94.
d. The
typical R2 for a stock is about 0.6 and
the typical R2 for a portfolio is also
about 0.6.
e. The
typical R2 for a stock is about 0.3 and
the typical R2 for a portfolio is also
about 0.3.
other
individual stocks so therefore the R. will be greater for a large portfolio
5. Which
of the following statements is CORRECT?
a. The
characteristic line is the regression line that results from plotting the
returns on a
particular
stock versus the returns on a stock from a different industry.
b. The
slope of the characteristic line is the stock's standard deviation.
c. The
distance of the plot points from the characteristic line is a measure of the
stock's
market
risk.
d. The
distance of the plot points from the characteristic line is a measure of the
stock's
diversifiable
risk.
e.
"Characteristic line" is another name for the Security Market Line.
Chapter 26
Week 6
1. Which
of the following is NOT a real option?
a. The
option to buy shares of stock if its price goes up.
b. The
option to expand into a new geographic region.
c. The
option to abandon a project.
d. The
option to switch the type of fuel used in an industrial furnace.
e. The
option to expand production if the product is successful.
2. Which
of the following will NOT increase the
value of a real option?
a. An
increase in the volatility of the underlying source of risk.
b. An
increase in the risk-free rate.
c. An
increase in the cost of obtaining the real option.
d. A
decrease in the probability that a competitor will enter the market of the
project in
question.
e.
Lengthening the time in which a real option must be exercised.
3. Which
of the following is most CORRECT?
a. Real
options change the risk, but not the size, of projects' expected cash flows.
b. Real
options are likely to reduce the cost of capital that should be used to
discount a
project's
expected cash flows.
c. Very
few projects actually have real options.
d. Real
options are less valuable when there is a lot of uncertainty about the true
values
future
sales and costs.
e. Real
options change the size, but not the risk, of projects' expected cash flows.
4. Ashgate
Enterprises uses the NPV method for selecting projects, and it does a
reasonably good
job of
estimating projects' sales and costs. However, it never considers real options
that might be
associated
with projects. Which of the following statements is most likely to describe its
situation?
a. Its
estimated capital budget is probably too large due to its failure to consider
abandonment
and growth options.
b.
Failing to consider abandonment and flexibility options probably makes the
optimal
capital
budget too large, but failing to consider growth and timing options probably
makes
the
optimal capital budget too small, so it is unclear what impact not considering
real
options
has on the overall capital budget.
c.
Failing to consider abandonment and flexibility options probably makes the
optimal
capital
budget too small, but failing to consider growth and timing options probably
makes
the
optimal capital budget too large, so it is unclear what impact not considering
real
options
has on the overall capital budget.
d. Real
options should not have any effect on the size of the optimal capital budget.
e. Its
estimated capital budget is probably too small, because projects' NPVs are
often
larger
when real options are taken into account.
5. Refer
to Exhibit 26.1. Since the project is considered to be quite risky, a 20% cost
of capital is
used.
What is the project's expected NPV, in thousands of dollars?
a.
$336.15
b.
$373.50
c.
$415.00
d.
$461.11
e.
$507.22
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