Question

10) Standard deviation measures which type of risk? 10) A) Economic B) Total C) Systematic D) Unsystematic E) Non diversifiable issued by JW 11) 11) The bond market requires a return of9.8 percent on the five-year bonds Industries. The 9.8 percent is referred to as which one of the following? A) Face rate B) Coupon rate C) Call rate. D) Yield to maturity. E) Current yield. 12) What are the distributions of either cash or stock to shareholders by a corporation called? A) Coupon payments. B) Capital payments. C) Dividends. D) Retained earnings. E) Diluted profits. 13) The value of a firm is maximized when the: 13) A) Cost of equity is maximized. B) Weighted average cost of capital is minimized. C) Tax rate is zero. D) Debt-equity ratio is minimized. E) Levered cost of capital is maximized. 14) Chelsea Fashions is expected to pay an annual dividend of $1.10 a share next year. The 4 market price of the stock is $21.80 and the growth rate is 4.5 percent. What is the firm's cost of equity!? A) 9.55 percent B) 7.91 percent C) 9.24 percent D) 9.77 percent E) 10.54 percent

Answer 1

10) Option (b)

Standard deviation will give total risk.

11) Option (d)

Return expected from the bond will be the yield to maturity and not the other options as the return is expectedfive years later.

12) Option (c)

Only in dividends, both stock and cash payout can be made available to the shareholders.

13) Option (b)

Wacc is the one which needs to be minimized to maximize the value of the firm as the Wacc will be in the denominator and it shouldbe small.

14) Option (a)

Cost of equity = (Dividend/Market value)+Growth rate

= ($1.1/$21.80)+4.5% = 9.55%