Stock A has a beta = 1.5, while Stock B has a beta = 0.5. Which of the following

Question

Stock A has a beta = 1.5, while Stock B has a beta = 0.5. Which of the following statements is CORRECT? Engler Equipment has a beta of 0.88 and an expected dividened growth rate of 4.00 % per year. The T-bill rate is 4.00 %, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25 %. Investors expect the average annual future return on the market to be 12.50%. Using the SML, what is the firm's required rate of return? Stocks A and B have the same price, but Stock A has the higher required rate of return. Is the following statement correct ? Explain. If stock A has a lower dividened yield than Stock B, its expected capital gains yield must be higher than Stock B's. Which of the following statements is CORRECT ?

Explanation / Answer

Answer:9 d.

Answer:10

        rs = rRF + RPM

12.50% = 5.25% + RPM

   RPM = 7.25%

Use SML to determine the firm’s required return using RPM calculated above.

rs = rRF + RPM × b

   = 5.25% + (7.25% × 0.88)

   = 11.63%

Answer:11 f Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B’s

Answer:12 d. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.

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