Reference no: EM132775311

Questions -

Q1) The common share of The Dominic Companies should return 29% in a boom, 12% in a normal economy and -15% in a recession. The probabilities of a boom, normal economy and recession are 12%, 86% and 2%, respectively. What is the variance of the returns on this share?

a. 0.005809

b. 0.005019

c. 0.006047

d. 0.004701

e. 0.006270

Q2) Which of the following statements is false?

a. With all-equity companies, the rate of return to shareholders is always equal to the rate of return on assets.

b. With debt, the rate of return to shareholders is always equal to the rate of return on assets providing the rate of return on assets is equal to the interest rate.

c. If the rate of return on assets is greater than the interest on debt, then leverage results in lower rates of return on equity.

d. If the rate of return on assets is less than the interest rate on debt, then leverage results in lower rates of return on equity.

Q3) Over the past 10 years, large-company shares have returned 11.2%. The risk premium on these shares was 4.8% and the inflation rate was 3.7%. What was the risk-free rate of return?

a. 2.7%

b. 6.4%

c. 7.5%

d. 8.5%

Q4) A share has an expected return of 10%, the risk-free rate is 3%, and the market risk premium is 3.5%. If the share is correctly priced, what must the beta of this share be?

a. 1.4

b. 3.5

c. 0.7

d. 2.0