BUSI 320 EXAM Questions and Answers Verified
Solutions Latest Update
Question 1.
Kn = D1/Po-F + g New cost of equity Po = D1/Ke - g
Correct Answer: Price of stock today = Dividend at end of first yr/Cost of
equity(required rate of return) -
growth rate
Question 2.
CAPM = Capital Asset Pricing Model Kj=Rf + B (Km - Rf)
Correct Answer: Required return on stock = Risk-free rate of return + Beta
coefficient times (return in market
- risk-free rate of return)
Financial capital Bonds, preferred stock, common equity V = st. dev./Dbar
Coefficient of Variation
Divide standard deviation of investment over expected value Eliminates size
difficulty in comparing
investments Dbar (expected value) Weighted average of outcomes (D) times their
probabilities (P) st.
dev. standard deviation = sq. root of (sum of (D - Dbar)^2*P) beta used with
portfolios of common stock
measures volatility of returns beta = 1.0 = equal risk with market beta >1.0 = higher
risk than market beta
<1.0 = less risk than market
Efficient frontier best risk-return line Payback method Time required to recoup
initial investment IRR
Determines yield of investment Calculate interest rate that equates cash outflows
with subsequent cash
inflows NPV Discounting cash inflows over life of investment to determine if they
equal or exceed
required cash outflow (investment)
Profitability index = Present value Inflows/Present value Outflows Helpful for
comparing returns from
different-size investments
Solutions Latest Update
Question 1.
Kn = D1/Po-F + g New cost of equity Po = D1/Ke - g
Correct Answer: Price of stock today = Dividend at end of first yr/Cost of
equity(required rate of return) -
growth rate
Question 2.
CAPM = Capital Asset Pricing Model Kj=Rf + B (Km - Rf)
Correct Answer: Required return on stock = Risk-free rate of return + Beta
coefficient times (return in market
- risk-free rate of return)
Financial capital Bonds, preferred stock, common equity V = st. dev./Dbar
Coefficient of Variation
Divide standard deviation of investment over expected value Eliminates size
difficulty in comparing
investments Dbar (expected value) Weighted average of outcomes (D) times their
probabilities (P) st.
dev. standard deviation = sq. root of (sum of (D - Dbar)^2*P) beta used with
portfolios of common stock
measures volatility of returns beta = 1.0 = equal risk with market beta >1.0 = higher
risk than market beta
<1.0 = less risk than market
Efficient frontier best risk-return line Payback method Time required to recoup
initial investment IRR
Determines yield of investment Calculate interest rate that equates cash outflows
with subsequent cash
inflows NPV Discounting cash inflows over life of investment to determine if they
equal or exceed
required cash outflow (investment)
Profitability index = Present value Inflows/Present value Outflows Helpful for
comparing returns from
different-size investments
