Multiple choice
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4. Which of the following statements is correct?
"Characteristics line" is another name for the Security Market Line.
The characteristics 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.
The slope of the characteristic line is the stock's standard deviation.
The distance of the plot points from the characteristics line is a measure of the stock's market risk.
The distance of the plot points from the characteristics line is a measure of the stock's discounted diversifiable risk.
5. (TCO D) A share of common stock has just paid a dividend of $2. If the expected long-run growth rate for this stock is 5%, and if investors required rate of return is 10.5%, what is the stock price?
$35.39
$38.80
$37.23
$38.18
$39.14
6. If Do = $2.75, g (which is constant) = 3%, and Po - $36, what is the stock's expeced total return for the coming year?
9.82%
10.07%
10.33%
10.60%
10.87%
7. You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6%, the cost of preferred is 7.5%, and the cost of retained earnings is 13.25%. the firm will not be issuing any new stock. What is its WACC?
9.48%
9.78%
10.07%
10.37%
10.68%
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The solution explains some multiple choice questions relating to stock valuation
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4. The distance of the plot points from the characteristics line is a measure of the stock's market risk.
The characteristic line is a plot of security returns with the market returns and so the plot points give a ...
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