# Solved: 1 The expected return on KarolCo stock is 16 5 percent

1) The expected return on KarolCo. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market assuming CAPM is true?
a. 2.5%
b. 5.0%
c. 7.5%
d. 10.0%

2) Using the above information, what is the rate of return on the market?
a. 2.5%
b. 5.0%
c. 7.5%
d. 10.0%

3) The expected return for Stock Z is 30 percent. If we know the following information about Stock Z:
Return Probability
Poor 0.2 0.25
Lukewarm ? 0.5
Dynamite! 0.4 0.25
What return will stock Z produce in the Lukewarm state of the world?
A) 20%
B) 30%
C) 40%
D) It is impossible to determine.

4) The risks that diversification cannot eliminate are:
a. Interest rate risk.
b. risk due to a recession.
c. inflation risk.
d. systematic risk.
e. all of the above

5) Kevin purchased a stock a year ago that pays a dividend. He has earned a 50%.
The stock was purchased for \$16 and is now worth \$21. What is the amount of dividends received during the year?
a. \$5
b. \$4
c. \$3
d. \$2

6) John is investing in the S&P 500. His expected return on the S&P 500 is 10% with a standard deviation of 4%. If John is investing \$200,000, then what is the dollar range of returns that John can have with 90 percent confidence at the end of the year?
a. \$212,000 – \$228,000
b. \$206,840 – \$233,160
c. \$204,320 – \$235,680
d. \$199,400 – \$240,600

7) Microsoft’s beta is 1. The risk free rate of return is 2%. If the expected return on the market is 12 percent, then the expected return on Microsoft is:
a. 12 percent
b. 15 percent
c. 8 percent
d. 10 percent

8) What is the relationship between present value and future value interest factors?
A. The present value and future value factors are equal to each other.
B. The present value factor is the exponent of the future value factor.
C. The future value factor is the exponent of the present value factor.
D. The factors are reciprocals of each other.
E. There is no relationship between these two factors.

9) An investment that costs \$50,000 will return \$15,000 operating cash flows per year for five years. Determine the net present value of the investment if the required rate of return is 14 percent. Should the investment be undertaken?
A. Yes, the profit is \$25,000.
B. No, the accounting return is less than 14%.
C. No, the net present value is negative at \$11,045.
D. Yes, the net present value is positive at \$1,496.50.

10) What is the net present value of a project with the following cash flows if the required rate of return is 15 percent?
Year Cash Flow
0 …….. -\$42,398
1 ……… 13,407
2 ……… 21,219
3 ………. 17,800

A. -\$1,574.41
B. -\$1,208.19
C. -\$842.12
D. -\$2,991.34
E. \$1,311.16

1 The expected return on KarolCo stock is 16 5 percent 