MBA 702 EXAM 3 Questions with
Correct Answers 2026 Updated.
LSUS Corporation has 80,000 bonds outstanding that are selling at par value. Bonds with similar
characteristics are yielding 8.6 percent. The company also has 4 million shares of common stock
outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is
yielding 4 percent and the market risk premium is 8 percent. LSUS Corporation's tax rate is 34
percent. What is LSUS Corporation's weighted average cost of capital? - Answer 11.47%
A year ago, Han purchased 500 shares of LSUS Corporation's stock at a price of $49.03 per
share. The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for
$58.14 per share. What is his total dollar return on this investment? - Answer $4,605
A stock had returns of 12 percent, 6 percent, 13 percent, -11 percent, and -2 percent over the
past five years. What is the geometric average return for this time period? - Answer 3.19%
Assume LSUS Corproation is similar to its industry with one exception, it has high fixed costs
relative to all other firms in that industry. Given this, you should expect LSUS Corproation -
Answer a higher beta than its industry.
The weighted average cost of capital for a firm is the: - Answer overall rate which the firm
must earn on its existing assets to maintain its value.
Which one of these statements related to beta is correct? - Answer The sample size used to
compute beta may be too small to yield a reliable result.
Standard deviation measures _____ risk while beta measures ____ risk. - Answer
unsystematic; systematic
The beta of a firm is more likely to be high under which two conditions? - Answer high
cyclical business activity and high operating leverage
You have a portfolio comprised of two risky securities. This combination produces no
diversification benefit. The lack of diversification benefits indicates the returns on the two
securities: - Answer move perfectly in sync with one another.
Which one of the following statements concerning the standard deviation is correct? - Answer
The higher the standard deviation, the higher the expected return.
, A portfolio consists of Stocks A and B and has an expected return of 11.6 percent. Stock A has an
expected return of 17.8 percent while Stock B is expected to return 8.4 percent. What is the
portfolio weight of Stock A? - Answer 34.04%
The excess return you earn by moving from a relatively risk-free investment to a risky
investment is called the: - Answer risk premium.
LSUS Corporation's stock has a beta of 1.23. The risk-free rate of return is 2.86 percent and the
market rate of return is 11.47 percent. What is the amount of the risk premium on LSUS
Corporation's stock? - Answer 10.59%
Capital market history shows us that a correct ordering of the average arithmetic mean return
for asset classes, from lowest to highest, is: - Answer U.S. Treasury bills, government bonds,
corporate bonds, large-company stocks.
Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk.
- Answer systematic
MM Proposition II is the proposition that: - Answer the cost of levered equity depends solely
on the return on debt, the debt-equity ratio, and the tax rate.
One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When
following this strategy: - Answer stockholders expropriate value from bondholders by
selecting high-risk projects.
MM Proposition I with no tax supports the argument that: - Answer it is completely
irrelevant how a firm arranges its finances.T
The LSUS Corproation has a levered cost of equity of 14.29 percent and a pretax cost of debt of
7.23 percent. The required return on the assets is 11 percent. What is the its debt-equity ratio
based on MM Proposition II with no taxes? - Answer 0.87
The free cash flow hypothesis states: - Answer that issuing debt requires interest and
principal payments to be paid thereby reducing the potential of management to waste
resources.
LSUS Corporation has shares of stock outstanding with a par value of $1 per share and a market-
to-book ratio of 2.1. The balance sheet shows $5,000 in the common stock account, $58,000 in
the capital in excess of par account, and $32,500 in the retained earnings account. The firm just
announced a 50 percent stock dividend. What is the value of the common stock account after
the dividend? - Answer 7500
Correct Answers 2026 Updated.
LSUS Corporation has 80,000 bonds outstanding that are selling at par value. Bonds with similar
characteristics are yielding 8.6 percent. The company also has 4 million shares of common stock
outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is
yielding 4 percent and the market risk premium is 8 percent. LSUS Corporation's tax rate is 34
percent. What is LSUS Corporation's weighted average cost of capital? - Answer 11.47%
A year ago, Han purchased 500 shares of LSUS Corporation's stock at a price of $49.03 per
share. The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for
$58.14 per share. What is his total dollar return on this investment? - Answer $4,605
A stock had returns of 12 percent, 6 percent, 13 percent, -11 percent, and -2 percent over the
past five years. What is the geometric average return for this time period? - Answer 3.19%
Assume LSUS Corproation is similar to its industry with one exception, it has high fixed costs
relative to all other firms in that industry. Given this, you should expect LSUS Corproation -
Answer a higher beta than its industry.
The weighted average cost of capital for a firm is the: - Answer overall rate which the firm
must earn on its existing assets to maintain its value.
Which one of these statements related to beta is correct? - Answer The sample size used to
compute beta may be too small to yield a reliable result.
Standard deviation measures _____ risk while beta measures ____ risk. - Answer
unsystematic; systematic
The beta of a firm is more likely to be high under which two conditions? - Answer high
cyclical business activity and high operating leverage
You have a portfolio comprised of two risky securities. This combination produces no
diversification benefit. The lack of diversification benefits indicates the returns on the two
securities: - Answer move perfectly in sync with one another.
Which one of the following statements concerning the standard deviation is correct? - Answer
The higher the standard deviation, the higher the expected return.
, A portfolio consists of Stocks A and B and has an expected return of 11.6 percent. Stock A has an
expected return of 17.8 percent while Stock B is expected to return 8.4 percent. What is the
portfolio weight of Stock A? - Answer 34.04%
The excess return you earn by moving from a relatively risk-free investment to a risky
investment is called the: - Answer risk premium.
LSUS Corporation's stock has a beta of 1.23. The risk-free rate of return is 2.86 percent and the
market rate of return is 11.47 percent. What is the amount of the risk premium on LSUS
Corporation's stock? - Answer 10.59%
Capital market history shows us that a correct ordering of the average arithmetic mean return
for asset classes, from lowest to highest, is: - Answer U.S. Treasury bills, government bonds,
corporate bonds, large-company stocks.
Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk.
- Answer systematic
MM Proposition II is the proposition that: - Answer the cost of levered equity depends solely
on the return on debt, the debt-equity ratio, and the tax rate.
One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When
following this strategy: - Answer stockholders expropriate value from bondholders by
selecting high-risk projects.
MM Proposition I with no tax supports the argument that: - Answer it is completely
irrelevant how a firm arranges its finances.T
The LSUS Corproation has a levered cost of equity of 14.29 percent and a pretax cost of debt of
7.23 percent. The required return on the assets is 11 percent. What is the its debt-equity ratio
based on MM Proposition II with no taxes? - Answer 0.87
The free cash flow hypothesis states: - Answer that issuing debt requires interest and
principal payments to be paid thereby reducing the potential of management to waste
resources.
LSUS Corporation has shares of stock outstanding with a par value of $1 per share and a market-
to-book ratio of 2.1. The balance sheet shows $5,000 in the common stock account, $58,000 in
the capital in excess of par account, and $32,500 in the retained earnings account. The firm just
announced a 50 percent stock dividend. What is the value of the common stock account after
the dividend? - Answer 7500
