Question

1. We observe that on average the market premium increased by 10% while the rate of return on XYZ stock decreased by 3%. The beta of XYZ stock is

Multiple Choice

• 0.3

• -3.33

• -0.3

• 3.33

2. Wholesale Foods common stock is valued at $15 per share. The firm pays annual dividends which increase at a constant rate. The just paid dividend was $0.4 . The required return is 10 percent. What is the dividend growth rate?

Multiple Choice

• 10.71 %

• 5.71 %

• 7.33 %

• 7.14%

3. Which one of the following prices will an individual investor have to pay if he or she buys shares of Microsoft?

Multiple Choice

• Instrinsic value

• Ask

• Bid

Answer 1

Answer :1 Correct option is -0.3

Calculation of Beta of XYZ Stock

Beta = % change in Security Return / % change in Market Premium

= - 3 % / 10%

= -0.3

Answer : 2 Correct option is 7.14%

Calculation of Dividend Growth rate

Cost of Equity = {[Current Dividend (1 + growth rate) ]/ Current Price} + Growth rate

10% = {[0.40 (1+growth rate)] / 15 } + Growth rate

10% * 15 = 0.40 + 0.40 growth rate + 15 Growth rate

1.5 = 0.40 + 15.40growth rate

1.5 - 0.40 = 15.40 growth rate

1.10 = 15.40 growth rate

==> Growth rate = 1.10 / 15.40

= 0.714 or 7.14%

Answer : 3 Correct Option is Ask price because  an individual investor have to pay that price which is asked by the seller of the security to pay for its securities if he or she wants to buys shares of Microsoft