2. Choice Questions (5 ScoreX4) (1) An analyst observes the following four annua

Question

2. Choice Questions (5 ScoreX4) (1) An analyst observes the following four annual returns: Ri +10%, Ri -15%, R3= 0%, and R4 = +5%. The average compound annual rate over the four years is closest to: 0.0%. (2) From the extended DuPont equation, which of the following components describes the equation EBT/ EBIT? A. Tax burden. B. Interest burden. C. Financial leverage. (3) A stock has a beta of 0.9 and an estimated return of 10%. The risk-free rate is 7%, and the expected return on the market is 11%. According to the CAPM, this stock: A. is overvalued. B. is undervalued. C. is properly valued. (4) One year ago, an investor purchased a 10-year, $1,000 par value, 8% semiannual coupon bond with an 8% yield to maturity. Now, one year later, interest rates remain unchanged at 8%. If the investor sells the bond today

Explanation / Answer

Part 1:

Answer: B) – 0.5%

Explanation:

Part 2:

Answer: B) Interest burden

Explanation:

Part: 3

Answer: B) Undervalued

Explanation:

Now since the expected rate of return by CAPM (10.6%) is higher than the estimated rate of return (10%) , so the stock is undervalue, i.e. the stock values more than what is estimated.

Note: Chegg mandates answering 1st question (if not specified), though it encourages answering as much as possible. So as an expert we have answered all the questions.

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