Three Stocks Have Share Prices of $12, $75, and $30

question 65

Multiple Choice

Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

• A) 300
• B) 39
• C) 43
• D) 30

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Definitions:

Financial Risk

The possibility of losing money on an investment or business venture, usually due to changes in market conditions or poor financial management.

Levered Firms

Companies that use debt in addition to equity in their capital structure.

Unlevered Firms

Companies that operate without the use of borrowed money or financial leverage.

M&M Proposition II

A theory proposing that the cost of equity for a leveraged firm increases linearly with its level of debt, holding the cost of debt constant.