Corporate Finance Exam 3 ACTUAL
Exam Questions and CORRECT Answers
According to CAPM, the amount of reward an investor receives for bearing the risk of an
individual security depends upon the: - CORRECT ANSWER - Market risk premium and
the amount of systematic risk inherent in the security.
The principle of diversification tells us that: - CORRECT ANSWER - Spreading an
investment across many diverse assets will eliminate idiosyncratic risk.
Which one of the following statements is correct concerning unsystematic risk? - CORRECT
ANSWER - Eliminating idiosyncratic risk is the responsibility of the individual investor.
To convince investors to accept greater volatility, you must: - CORRECT ANSWER -
Increase the risk premium.
If world events caused investors to become more risk-averse, you would expect the market risk
premium (i.e. rm - rf) to: - CORRECT ANSWER - increase
Which of the following represents an idiosyncratic source of risk?
I. The Federal Reserve unexpectedly increases interest rates.
II. A firm experiences a warehouse fire.
III. Congress approves an increase in the corporate tax rate.
IV. The CEO of a firm unexpectedly dies. - CORRECT ANSWER - II and IV only.
One year ago, you bought shares of Aaon, Inc at $36.48 a share. You received a dividend of
$1.62 per share last month and sold the stock today for $41.18 a share. What is the capital gains
yield on this investment? - CORRECT ANSWER - 12.88%
CG yield= selling price/(purchase price-dividend)
, - dividend is usually 1
Ford Motors stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the market
risk premium is 7.92 percent. What is the expected rate of return on this stock? - CORRECT
ANSWER - 13.21%
expected rate of return stock= Rf+(BxMRP)
MRP - CORRECT ANSWER - market risk premium
The common stock of Ecolab pays an annual dividend of $1.84 a share. The company has
promised to maintain a constant dividend regardless of economic conditions. How much would
investors be willing to pay for one share of Ecolab's stock assuming an equity cost of capital of
13.6%? - CORRECT ANSWER - 13.53
Pt= (Do(1+g))/(Re-G)
Do= current dividend
Re=equity COC
Dunkin' Brands just paid an annual dividend of $1.10 a share. The firm expects to increase this
dividend by 8 percent per year the following three years and then decrease the dividend growth
to 2 percent annually thereafter. Which one of the following is the correct computation of the
dividend for year 7? - CORRECT ANSWER - ($1.10) (1.08)^3 (1.02)^4
dividend: 1.10
g for 1st 3 yrs: 8%
g after 3 yrs: 2%
dividend of 7 years
Whole Foods will pay an annual dividend of $1.85 next year. The company just announced that
future dividends will be increasing by 2 percent annually. How much are you willing to pay for
one share of this stock if you require a 14 percent return? - CORRECT ANSWER - 15.42
dividend discount model Constant dividend growth
Po= dividend1/(Re-g)
Exam Questions and CORRECT Answers
According to CAPM, the amount of reward an investor receives for bearing the risk of an
individual security depends upon the: - CORRECT ANSWER - Market risk premium and
the amount of systematic risk inherent in the security.
The principle of diversification tells us that: - CORRECT ANSWER - Spreading an
investment across many diverse assets will eliminate idiosyncratic risk.
Which one of the following statements is correct concerning unsystematic risk? - CORRECT
ANSWER - Eliminating idiosyncratic risk is the responsibility of the individual investor.
To convince investors to accept greater volatility, you must: - CORRECT ANSWER -
Increase the risk premium.
If world events caused investors to become more risk-averse, you would expect the market risk
premium (i.e. rm - rf) to: - CORRECT ANSWER - increase
Which of the following represents an idiosyncratic source of risk?
I. The Federal Reserve unexpectedly increases interest rates.
II. A firm experiences a warehouse fire.
III. Congress approves an increase in the corporate tax rate.
IV. The CEO of a firm unexpectedly dies. - CORRECT ANSWER - II and IV only.
One year ago, you bought shares of Aaon, Inc at $36.48 a share. You received a dividend of
$1.62 per share last month and sold the stock today for $41.18 a share. What is the capital gains
yield on this investment? - CORRECT ANSWER - 12.88%
CG yield= selling price/(purchase price-dividend)
, - dividend is usually 1
Ford Motors stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the market
risk premium is 7.92 percent. What is the expected rate of return on this stock? - CORRECT
ANSWER - 13.21%
expected rate of return stock= Rf+(BxMRP)
MRP - CORRECT ANSWER - market risk premium
The common stock of Ecolab pays an annual dividend of $1.84 a share. The company has
promised to maintain a constant dividend regardless of economic conditions. How much would
investors be willing to pay for one share of Ecolab's stock assuming an equity cost of capital of
13.6%? - CORRECT ANSWER - 13.53
Pt= (Do(1+g))/(Re-G)
Do= current dividend
Re=equity COC
Dunkin' Brands just paid an annual dividend of $1.10 a share. The firm expects to increase this
dividend by 8 percent per year the following three years and then decrease the dividend growth
to 2 percent annually thereafter. Which one of the following is the correct computation of the
dividend for year 7? - CORRECT ANSWER - ($1.10) (1.08)^3 (1.02)^4
dividend: 1.10
g for 1st 3 yrs: 8%
g after 3 yrs: 2%
dividend of 7 years
Whole Foods will pay an annual dividend of $1.85 next year. The company just announced that
future dividends will be increasing by 2 percent annually. How much are you willing to pay for
one share of this stock if you require a 14 percent return? - CORRECT ANSWER - 15.42
dividend discount model Constant dividend growth
Po= dividend1/(Re-g)
