16. Which of the following would NOT result in higher required returns for the m

Question

16. Which of the following would NOT result in higher required returns for the market portfolio?

a. An increase in stock prices

b. An increase in expected inflation

c. An increase in risk aversion

d. An increase in the Market Risk Premium

17. In case of Bankruptcy, investors are paid in this order.

a)Preferred Stock, Common Stock, Bonds

b)Preferred Stock, Bonds, Common Stock

c)Debt, Common Stock, Preferred Stock

d)Debt, Preferred Stock, Common Stock

20. Which statement is TRUE?

a. According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio

b. An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held

c. If investors become less averse to risk, the slope of the Security Market Line (SML) will increase

d. Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return

22. Which statement is CORRECT?

a)The WACC acts as a Required Return for evaluating all of a firm

Explanation / Answer

16(a) Increase in stock prices

17(d) Debt, preferred stock, common stock

20 (c) If investors become less averse to risk, the slope of the Security Market Line (SML) will increase

22(c)One method for estimating the cost of equity is the Bond-yield plus risk premium

23(a) YTC= 90+ 1050-1100/4 /1050+1100/2 = 7.2%

25(a) Sustainable growth rate = ROEx ( 1- Dividend payout ratio)

ROE= 100000/ 500000x100 = 20%

Dividend payout= 60000/100000x100 = 60%

Sustainable growth rate= 20%(1- 0.6) = 8%

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