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28 Nov 2019

9. Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)A When held in isolation, Stock A has more risk than Stock B. B Stock B must be a more desirable addition to a portfolio than A. C Stock A must be a more desirable addition to a portfolio than B. D The expected return on Stock A should be greater than that on B. E The expected return on Stock B should be greater than that on A.

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Nestor Rutherford
Nestor RutherfordLv2
26 Nov 2019
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The tendency of a stock's price to move up and down with themarket is reflected in its beta coefficient. Therefore, beta is ameasure of an investment's market risk, and is a key element of theCAPM. In this part of the project, you get financial informationusing Yahoo!Finance (found at http://finance.yahoo.com/ ) To find acompany's beta, enter the desired stock symbol and request a basicquote. Once you have the basic quote, select the "Key Statistics".Scroll down this page to find the stock's beta. In your initialresponse to the topic you have to answer all 5 questions. You areexpected to make your own contribution in a main topic as well asrespond with value added comments to at least two of yourclassmates as well as to your instructor. From Yahoo!Finance obtaina report on any two companies.

1.What are the betas listed for these companies?

2.If you made an equal dollar investment in each stocks whatwould be the beta of your portfolio?

3.If you made 70% of dollar investment in stock A, and 30% ofdollar investment in stock B, what would be the beta of yourportfolio? Please show your work.

4.Apply the Capital Asset Pricing Model (CAPM) Security MarketLine to estimate the required return on these two stocks.Assumptions and Data: Note that you will need the risk-free rateand the market risk premium. Assume a 5% market risk premium. Toget the current yield on 10-year Treasury securities go toFinance!Yahoo’s (www.finance.yahoo.com) -click on Market Data -Bonds. You will use the current yield on 10-year Treasurysecurities as the risk-free rate to estimate the required rate ofreturn on stocks.

5.Compare the required return on these stocks calculated usingCAPM in question #4 against their historical return over the last52 weeks, found in the Yahoo!Finance - Key Statistics. Is there adifference between these returns? Is this a problem? Why is there adifference?

1. Which of the following statements is true about apartnership?

a. One capital and one drawings account is used for eachpartnership.

b. The capital account is used to record each partner'sinvestment and that partner's designated share of the earnings.

c. Partnerships are subject to separate income taxes.

d. The drawings account is closed to retained earnings at theend of the period.

2. Which of the followingstatements does not correctly describe preferred stock?

a. Preferred shareholders have a preference with respect todividend payments.

b. Preferred shareholders have a preference with respect toassets in the event of dissolution.

c. Preferred shareholders have voting rights on a per sharebasis.

d. Preferred stock typically has a fixed dividend rate.

3. Which of the followingstatements is false?

a. Common stockholders have a residual claim on assets in theevent of liquidation.

b. Shares of stock held in the treasury are subtracted from thenumber of issued shares in the determination of the number ofoutstanding shares.

c. Common stockholders have voting rights at annual stockholdermeetings.

d. Corporations are governed by their stockholders.

4. Which of the following would not be reportedas a financing activities cash flow?

a. Issuing common stock for cash.

b. Cash dividend payments.

c. Purchasing treasury stock.

d. Purchase of a building by signing a note payable.

5. Which of the following is not reported as acash flow from investing activities?

a. Sale of a depreciable asset for cash.

b. Purchasing land in exchange for common stock.

c. Selling a long-term investment at a loss for cash.

d. Purchase of a patent in exchange for cash.

6. Which of the following transactions would be reported withinthe investing section of the cash flow statement?

a. The cash sale of land at a loss.

b. The purchase of a building in exchange for common stock.

c. The receipt of a stock dividend from a stock investment.

d. The cash receipt of a dividend from a stock investment.

7. Which of the following would be subtracted from net incomewhen determining cash flows from operating activities under theindirect method?

a. A decrease in utilities payable.

b. Patent amortization expense.

c. A decrease in prepaid rent.

d. A loss on the sale of a depreciable asset.

7. Which of the following would be added to net income whendetermining cash flows from operating activities under the indirectmethod?

a. A decrease in accounts payable.

b. Patent amortization expense.

c. An increase in prepaid insurance.

d. A gain on the sale of a depreciable asset.

8. Which of the following would not be a cashflow from financing activities?

a. Issuance of common stock for cash.

b. Borrowing cash on a long-term note payable.

c. Collection of a cash dividend.

d. Repayment of principal on a long-term note payable.

9. The cash payment of a previously declared dividend increaseswhich of the following ratios?

a. Debt-to-equity.

b. Earnings per share.

c. Price/earnings ratio.

d. Asset turnover.

10. The debt-to-equity ratio measures which of thefollowing?

a. Liquidity.

b. Solvency.

c. Profitability.

d. Market strength.

11. Negative financial leverage occurs when the:

a. Average net (after tax) interest rate on borrowed funds isless than the company's earnings rate on its assets.

b. Return on assets is more than return on equity.

c. Return on equity is more than return on assets.

d. Operating expenses exceed gross profit.

12. Which of the following ratios is notconsidered to be a test of profitability?

a. Current ratio.

b. Profit margin.

c. Return on assets.

d. Earnings per share.

13. Home Depot's operating strategy is to offer a broadassortment of high-quality merchandise and services at competitiveprices using highly knowledgeable service-oriented personnel andaggressive advertising. Which of the following isnot as critical to achieving Home Depot'sstrategy?

a. Cost control

b. Product differentiation

c. High level of customer service

d. High sales volume

13. Which of the following ratios is not partof the DuPont model?

a. Asset turnover.

b. Debt-to-equity.

c. Net profit margin.

d. Return on equity.

Which of the following statements is notcorrect?

Purchasing fixed assets through debt financing decreases thefinancial leverage ratio.

Accruing an expense will affect the net profit margin ratio.

Return on equity may increase even when the financial leverageratio decreases.

Purchasing treasury stock results in a decrease in assetturnover.

5. The company’s common stock is going to pay a dividend is $2.00 per share after one year. Dividends are expected to grow at 10 percent per year for 2 years after that ($2.20 two years from now, and $2.42 3 years from now), and 4% thereafter.

The expected market return is 6%, your stock has a beta of 1.2. The return on riskless government bonds is 2%.

1. Assuming CAPM is correct, what should be the price of the stock?

2. Suppose the market price of the stock is $30 (different from the price that CAPM says it should be), what would you tell the investors about investing in the stock?

Concept Check: Capital is acquired in the marketplace. For many of us it is in the form of loans; publicly traded companies have access to debt in the form of bonds and equity in the form of stocks. In any instance we are being judged as to how much of a risk is the capital at for not being recovered. Risks include (but are not limited to); inflation or the erosion of the value of my money; opportunity costs in the form of interest free government securities, compensation for the chance of not being paid back (default risk), compensation for the length of time the capital is at risk (maturity) and compensation for the ability to be able to turn the investment of capital into cash by trading it or converting the obligation (liquidity risk).

Helpful Hint: We need to look at this from the market perspective of what is a fair rate of return for the investment compared to alternatives available.

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