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Chapter 5:
(a) 23 Assume that a stock price-weighted indicator consisted of the four issues with their
prices. What are the values of the stock indicator for Day T and T + 1 and what is the
percentage change?
a) 36.25, 38.75, 6.9%
b) 38.75, 36.25, -6.9%
c) 100, 106.9, 6.9%
d) 107.48, 106.33, 1.15%
e) None of the above
(c) 24 For a value-weighted series, assume that Day T is the base period and the base value is
100. What is the new index value for Day T + 1 and what is the percentage change in the
index from Day T?
a) 106.33, 6.33%
b) 107.48, 7.48%
c) 109.93, 9.93%
d) 108.7, 8.7%
e) None of the above
775,000
Index x 100 109.93
705,000
(b) 28 Calculate a value weighted index for Jan. 13th if the initial index value is 100.
a) 111.54
b) 100m;
c) 102.31
d) 123.07
e) None of the above
(a) 29 Calculate a value weighted index for January 15th if the initial index value is 100.
a) 102.31
b) 100
c) 123.07
d) 111.54
e) None of the above
Chapter 7:
(d) 34 Calculate the expected return for E Services which has a beta of 1.5 when the risk free
rate is 0.05 and you expect the market return to be 0.11.
a) 10.6%
b) 12.1%
c) 13.6%
d) 14.0%
e) 16.2%
(c) 35 Calculate the expected return for F Inc. which has a beta of 1.3 when the risk free rate is
0.06 and you expect the market return to be 0.125.
a) 12.65%
b) 13.55%
c) 14.45%
d) 15.05%
e) 16.34%
(d) 36 Recently you have received a tip that the stock of Buttercup Industries is going to rise
from $76.00 to $85.00 per share over the next year. You know that the annual return on
the S&P 500 has been 13% and the 90-day T-bill rate has been yielding 3% per year over
the past 10 years. If beta for Buttercup is 1.0, will you purchase the stock?
a) Yes, because it is overvalued.
b) Yes, because it is undervalued.
c) No, because it is undervalued.
d) No, because it is overvalued.
e) Yes, because the expected return equals the estimated return.
You expect the risk-free rate (RFR) to be 5 percent and the market return to be 9 percent. You also have
the following information about three stocks.
(b) 37 What are the required rates of return for the three stocks (in the order X, Y, Z)?
a) 16.50%, 5.50%, 22.00%
b) 11.00%, 7.00%, 13.00%
c) 7.95%, 11.25%, 11.11%
d) 6.20%, 2.20%, 8.20%
e) 15.00%, 3.50%, 7.30%
(a) 38 What are the estimated rates of return for the three stocks (in the order X, Y, Z)?
a) 7.95%, 11.25%, 11.11%
b) 6.20%, 2.20%, 8.20%
c) 16.50%, 5.50%, 22.00%
d) 11.00%, 7.00%, 13.00%
e) 15.00%, 3.50%, 7.30%
23 22 .75
X .05 + 1.5(.09 - .05) = 11.0% 7.95% overvalued
22
43 40 1.50
Y .05 + 0.5(.09 -.05) = 7.0% 11 .25% undervalued
40
49 45 1.00
Z .05+ 2.0(.09 - .05) = 13.0% 11.11% overvalued
45
USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS
The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4
percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate
will increase to 7 percent for the next three years and the stock will then reach $25.00 per share.
(d) 40 How much should you be willing to pay for the stock if you require a 16 percent return?
a) $17.34
b) $18.90
c) $19.09
d) $19.21
e) None of the above
(c) 41 How much should you be willing to pay for the stock if you feel that the 7 percent growth
rate can be maintained indefinitely and you require a 16 percent return?
a) $11.15
b) $14.44
c) $14.86
d) $18.90
e) $19.24