Question

Just Answers

Need ASAP

Question 41

You want to create a $65,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 14.2 percent and Stock B has an expected return of 17.8 percent. You want to own $20,000 of Stock B. The risk-free rate is 4.8 percent and the expected return on the market is 13.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?

Select one:

a. $11,921

b. $13,509

c. $15,266

d. $17,315

e. $18,775

Question 42

Not yet answered

Marked out of 1.00

Not flaggedFlag question

Question text

A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is 0.74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta:

Select one:

a. must be 1.0 because of the large number of securities in the portfolio.

b. is the geometric average of the individual security betas.

c. must be less than the market beta.

d. will be between 0 and 1.0.

e. will be greater than or equal to 0.74 but less than or equal to 1.51.

Question 43

Not yet answered

Marked out of 1.00

Not flaggedFlag question

Question text

Ben & Terry's has an expected return of 12.9 percent and a beta of 1.25. The expected return on the market is 11.7 percent. What is the risk-free rate?

Select one:

a. 3.87 percent

b. 4.24 percent

c. 4.61 percent

d. 6.29 percent

e. 6.92 percent

Question 44

Not yet answered

Marked out of 1.00

Not flaggedFlag question

Question text

Kate is the CFO of a major firm and has the job of assigning discount rates to each project that is under consideration. Kate's method of doing this is to assign an incrementally higher rate as the risk level of the project increases over that of the current firm. Likewise, she assigns lower rates as the risk level declines. Which one of the following approaches is Kate using to assign the discount rates?

Select one:

a. Pure play approach

b. Divisional rating

c. Subjective approach

d. Straight WACC approach

e. Equity rating

Question 45

Not yet answered

Marked out of 1.00

Not flaggedFlag question

Question text

International Exchange has three divisions: A, B, and C. Division A has the least risk and Division C has the most risk. The firm has an aftertax cost of debt of 6.1 percent and a cost of equity of 14.3 percent. The firm is financed with 35 percent debt and 65 percent equity. Division A's projects are assigned a discount rate that is 3 percent less than the firm's weighted average cost of capital. What is the discount rate applicable to Division A?

Select one:

a. 7.98 percent

b. 8.27 percent

c. 8.44 percent

d. 9.48 percent

e. 13.43 percent

Answer 1

ANSWER :

41.  c. $15,266 

rE = 14.2*x/65 + 17.8*20/65 + 4.8 *(45-x)/65.  (Amounts in thousands)

=> 13.1 = (14.2 x + 356 + 216 - 4.8x)/65

=> 13.1*65 = 9.4 x + 572 

=> x = (13.1*65 - 572)/9.4 

=> x = 29.734 = 29734 ($)

In risk free security = 45-x = 45 - 29.734 = 15.266 = 15266 ($)

42. e. Will be greater than or equal to 0.74 but less than 1.51 or equal to 1.51.

43. e. 6.92% 

12.9 = rF + 1.25(11.7 - rF) = 14.625 - 0.25 rF

=>  rF = (14.625 - 12.9)/0.25 = 6.9% 

44. e. Equity rating 

45. c. 8.44%

WACC = 0.65*14.3 + 0.35*6.1 = 11.43 %

Rate for dept. A = 11.43 - 3 = 8.43% 

Answer 2

3 2*3 1 2 Weight Portfolio Return Asset Return Investment Q41 0.142 45000*x A 0.178 $ 0.048 45000*(1-x) В 20,000.00 0.307692308 0.05477 Risk free $65,000.00 0.13100 (45000x/65000*0.142)+0.05477+(45000-45000x)*0.048/65000 0.131 0.131 0.098308x+0.05477+0.033231-0.033231x 0.131-0.05477-0.033231 0.098308x-0.033231x 0.04300 0.065077x 0.660756501 X 1-x 0.339243499 45000 0.6607565 Investment in A 29734 45000 0.339243499 15266 Answer C Investment in Risk free