Question

PLEASE ANSWER THEM ALL, WILL GIVE THUMBS UP

1) Which Statement is True?

a) ABC Corp. has a return on investment (ROI) of 12% and a weighted average cost of capital (WACC) of 11%, while XYZ Corp. has an ROI of 10% and a WACC of 8%. In this situation, XYZ is performing better than ABC because XYZ is generating a higher Economic Value Added (EVA)

b) If you were super rich and had a huge portfolio of stocks that included one of each stock traded on the market, your portfolio should have a beta close to zero.

c) When the interest rate on a loan to Microsoft increases, systematic risk is increased; but when the Federal Reserve raises nation-wide rates, unsystematic risk is increased.

d)The Federal Reserve announced a decision to raise interest rates by 0.25%; this outcome had been discussed heavily in the news and was universally anticipated. When the announcement is made, the S&P 500 stock index should increase steeply.

e) As you age, you should shift from bonds (fixed-income) to stocks (equity) in your retirement fund.

f) A high-tech company would typically have a lower beta than a company that makes staple food products Large-company stocks usually carry larger default risk premiums than do small-company stocks; and Treasury bonds usually carry larger inflation and interest-rate risk premiums than do Treasury Bills

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2) Which of the following statements is NOT true?

a. A basic concept of Modigliani & Miller’s so-called “M&M Proposition” is that if taxes and bankruptcy costs are ignored, the debt/equity ratio in a firm shouldn’t matter (i.e. the overall pizza is the same size whether cut into four or eight pieces).

b. According to the Economic Value Added (EVA) model, a firm can only generate value if it earns a return on the use of funds that is higher than the cost of those funds.

c. One reason a company might carry a heavy debt loads is that higher leverage magnifies the gain (or loss) percentage and therefore increases the return on investment (ROI) percentage.

d. The Beardstown Ladies became famous for their savvy investing by consistently beating the S&P500; as a result, they are, to this very day, one of the most respected investment clubs in the U.S. e. Since the WACC represents the minimum required return, it is the rate used in NPV calculations in capital budgeting to evaluate investment alternatives.

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3) Which of the following statements is true?

a. Holding a well-diversified stock portfolio for 1 year or for 20 years should generate the same level of risk; therefore, the holding period is irrelevant to a stock investor.

b. A high dividend-yield stock fund should be considered riskier than a high growth stock fund.

c. One problem with selecting stocks by throwing darts is that your portfolio may end up being poorly diversified (e.g., the same stock is picked twice, or multiple stocks in the same industry are selected).

d. Adding international stocks to a portfolio should increase portfolio standard deviation . . . and this increase is getting larger as markets become more globalized.

e. None of the above statements is true.

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4) Which of the following statements is true?

a. Warren Buffet and other investors who rely on fundamental analysis mostly use a buy-and-hold strategy, as opposed to day-trading.

b. T-Bonds have more federal taxability risk than municipal bonds; but municipal bonds have more default and liquidity risk than T-bonds.

c. Compared to the arithmetic average, the geometric average tells you what you actually earned per year on average and is the true compound rate of return that causes a present value to become a future value under the principle of time-value-of-money.

d. All of the above statements are true. e. None of the above statements is true.

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5) Suppose you purchased a share of Avalon Motors common stock at the beginning of the year for $50 per share (P0). The stock paid a dividend of $5 per share at the end of the year (D1). Also, at the end of the year the price of the stock was $60 per share. Determine your approximate real return for the year, if annual inflation was 4%.

a. 26%

b. 21%

c. 16%

d. 11%

e. None of the above answers is correct

Answer 1

ANS- 1)

A) False, as economic value added = ROI * WACC, EVA of abc ltd is 1.32% whereas xyz ltd is. 80%. Hence abc ltd. is better than xyz ltd.

B) True, as portfolio with beta 0 means that the stocks are uncorrelated with each other i.e if one stock falls it will not effect the other stocks in the portfolio.

C) false, as fed interest rate increase then systematic risk increase and when Microsoft interest rate increase then unsystematic risk increases.

D) False, The S&P 500 will fall as fed increase the rate this is because now the companies on S&P 500 will have to incurred more cost on debts.

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