Question

1. Suppose that your company is expected to pay a dividend of $1.70/share next year. There has been a steady growth in dividends of 5.1% per year and the market expects that to continue. The current price is $35. What is the cost of equity?
a) 0.099 b) 0.200 c) 0.051 d) 0.102

2. Which one of the following is best classified as unsystematic risk?
a) An unexpected recessionary period b) An unexpected increase in interest rates c) Labour Strike d) A sudden increase in the inflation rate

3. The goal of diversification is to eliminate:
a) Total risk b) The market risk premium c) Systematic risk d) Unsystematic risk

4. A risk premium is defined as:
a) The expected market return b) The premium you have to pay for investing in risky assets c) The premium you have to pay for investing in assets that have high returns with low risk. d) The extra return received on an asset above the risk free rate

5. What is the Beta of the market?
a) 0 b) 1 c) 2 d) Depends on the systematic risk in the market risk in the market

6. When a financial market reflects all the available information in the prices of the securities, the market is referred to as:
a) Primary market b) Secondary market c) Efficient capital market d) Traditional market

7. A premium bond is a bond that:
a) Has a market price less than its par value b) Has a market price equal to its par value c) Has a market price which exceeds its par value d) Has a market price determined by the investment banks

8. If you invest $5,000 now, and your investment pays 12% per annum, how much will you have in three years if compounded quarterly?
a) $7,128.80 b) $7,218.80 c) $7,812.80 d) $7,182.80

9. Suppose your company has an equity beta of 0.58 and the current risk-free rate is 6.1%. If the expected market risk premium is 8.6%, what is your cost of equity capital?
a) 13.11%. b) 10.11% c) 12.32%. d) 11.09%.

10. Security Market Line (SML) is trying to display the relationship between:
a) Systematic risk and unsystematic risk b) Risk and return c) Assets and liabilities d) Equities and liabilities

Answer 1

1.

current price = D₁/(r-g)

r = 1.7/35 + 0.051

r = 0.099

2.

Labour strike

Explanation:

Unsystematic risk is the risk which can be eliminated by diversification, and is a specific risk

3.

Unsystematic risk

Explanation:

unsystematic risk can be eliminated away by diversification as it is a specific risk.

4.

The extra return received on an asset above the risk free rate

Explanation:

Risk premium is the return above risk free rate which is a compensation to take risk of investing in risky asset.

5.

1

Explanation:

Beta of market is 1 as beta is the standard deviation of return of asset relative to the market, as we are measuring relative to market so for market portfolio it is 1.

6.

Efficient capital market

Explanation:

As per efficient market hypothesis, in efficient markets all public information reflects in the stock price as soon as it becomes public.