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Multiple Choice

Question 21
GoodBuy stock has a beta of 1.75. The expected return on GoodBuy is 20%, while the expected return on the market portfolio is only 13%. The risk-free rate is 3%. Because GoodBuy lies __________ the SML, it is considered __________.

a. below; overpriced
b. below; underpriced
c. above; underpriced
d. above; overpriced
e. on; correctly priced

Question 22
Typically when valuing an asset, adjustments for risk are made by adjusting:

a. the number of time periods
b. the asset's expected cash flows
c. the asset's required return
d. the asset's terminal value
e. none of the above

Question 23
The value of long-term bonds is __________ sensitive to changes in __________ than short-term bonds.

a. more; interest rates
b. more; GDP growth
c. not; interest rates
d. less; GDP growth
e. less; interest rates

Question 24
Zoomers Inc. paid an annual dividend of $1.20 yesterday. If future dividends are expected to grow at a rate of 4 percent, and the required rate of return on this stock is 14 percent, the fair price of this stock today is:

a. $8.57
b. $12.00
c. $12.48
d. $13.68
e. None of the above

Question 25
Free cash flow represents the cash amount that a firm could distribute to __________.

a. bondholders
b. common stockholders
c. preferred shareholders
d. all of the above
e. none of the above

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Question 21
GoodBuy stock has a beta of 1.75. The expected return on GoodBuy is 20%, while the expected return on the market portfolio is only 13%. The risk-free rate is 3%. Because GoodBuy lies __________ the SML, it is considered __________.

a. below; overpriced
b. below; underpriced
c. above; underpriced
d. above; overpriced
e. on; correctly priced

Using the CAPM, the required return is
Required return = 3% + (13%-3%) X 1.75 = 20.50%. The expected return is 20%, the price of the stock should fall for the ...

Solution Summary

The solution explains various multiple choice questions in finance

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