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    CAPM, Valuation, Capital Budgeting

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    1) Currently, the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?

    a) An index fund with beta =1.0 should have a required return of 11%
    b) If a stock has a negative beta, its required return must also be negative
    c) An index fund with beta =1.0 should have a required return less than 11%
    d) If a stock's beta doubles, its required return must also double
    e) An index fund with beta = 1.0 should have a required return greater than 11%

    2) A stock has an expected return of 12.60%. Its beta is 1.49 and the risk-free rate is 5.00%. What is the market risk premium?

    a) 5.10%
    b) 5.23%
    c) 5.36%
    d) 5.49%
    e) 5.63%

    3) Millar Motors is a relatively small company and its beta is 1.30. The current 1-year T-Bill rate and 10-year T-bond rate are 2.00% and 4.00% respectively. In the past 10 years, the average rate on the 10-year T-bond rate has been 6.00%. For the same period the annual return on market indices for large stocks and small stocks have been 13.00% and 15.00% respectively. Investors expect Millar Motors' revenues to growth at 5% next year and the annual future stock market return to be 12.00%. For the purpose of Millar's cash flows, what is your estimate of the company cost of equity?

    a) 13.0%
    b) 18.9%
    c) 13.1%
    d) 15.7%
    e) 15.1%

    4) Suppose a company's projected free cash flow for next year is $500 million and it is expected to grow at a constant rate of 6 percent. If the company's weighted average cost of capital is 11 percent, what is the current value of operations, to the nearest million.

    a) $530 million
    b) $4,545 million
    c) $8,333 million
    d) $10,000 million
    e) $10,600 million

    5) The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost $40,000, has 6 years expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target's corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after-tax outlay for the new printing machine?

    a) -$22,180
    b) -$30,000
    c) -$33,600
    d) -$36,000
    e) -$40,000

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    Please see attached file
    1) Currently, the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?

    a) An index fund with beta =1.0 should have a required return of 11%
    b) If a stock has a negative beta, its required return must also be negative
    c) An index fund with beta =1.0 should have a required return less than 11%
    d) If a stock's beta doubles, its required return must also double
    e) An index fund with beta = 1.0 should have a required return greater than 11%

    Answer: a) An index fund with beta =1.0 should have a required return of 11%
    expected return = risk-free rate + beta x market risk premium
    required return for index fund with beta = 1 is 6% + 1 x 5% = 11%
    Thus c) and e) are incorrect
    It is not necessary for a stock with negative beta to have a negative required return.
    Suppose, risk free rate is 10% and market risk ...

    Solution Summary

    Answers 5 Multiple Choice Questions on CAPM (Capital Asset Pricing Model), Valuation, Capital Budgeting

    $2.19

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