CAPM, price of bonds, dividends
Not what you're looking for?
1) You are holding a stock which is currently in equilibrium. The required rate of return on the stock is 15 percent when the required return on the S&P 500 index is 10 percent. What will be the percentage change in the required return on the stock if the required return on the S&P 500 index increases by 30% while the risk free rate is unchanged? Your stock has a beta of 2.0.
a. +20%
b. +30%
c. +40%
d. +50%
e. +60%
2) A 20 year bond with a par value of $1000 has a 9 percent annual coupon. The bond currently sells for $925. If the bond's yield to maturity remains at its current rate, what will be the price of the bond 5 years from now?
a. $966.79
b. $831.35
c. $1090.00
d. $933.09
e. $925.00
3) Which of the following statements is most correct?
a. Assume that the required rate of return on a given stock is 13 percent. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is also 5%.
b. The dividend yield on a stock is equal to the expected return less the expected capital gains yeild.
c. A stock's dividend yield cna never exceed the expected growth rate.
d. All of the answers above are correct.
e. Answers b and c are correct.
Purchase this Solution
Solution Summary
Answers to 3 corporate finance multiple choice questions dealing with CAPM, price of bonds, dividends
Solution Preview
You are holding a stock which is currently in equilibrium. The required rate of return on the stock is 15 percent when the required return on the S&P 500 index is 10 percent. What will be the percentage change in the required return on the stock if the required return on the S&P 500 index increases by 30% while the risk free rate is unchanged? Your stock has a beta of 2.0.
a. +20%
b. +30%
c. +40%
d. +50%
e. +60%
Answer: c. +40%
Let us first find the risk free rate
CAPM (Capital Asset Pricing Model equation is:
r A= r f + beta A (r m - r f)
risk free rate= r f = to be determined
beta of stock= beta A= 2.0 (Given)
return on market portfolio= r m = 10% (S&P 500 index)
required return on stock r A = 15.00% (Given)
Plugging in the values
r f = 5. %
Now the required return on market portfolio increass by 30%
Therefore r m= 13% =10% * (1+30%)
risk free rate remians the same
Now calculate the required return on the stock
r A= r f + beta A (r m - r f)
risk free rate= r f = 5. ...
Purchase this Solution
Free BrainMass Quizzes
Basics of corporate finance
These questions will test you on your knowledge of finance.
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Business Ethics Awareness Strategy
This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.