Exhibit 87
Use the Information Below for the Following Problem(S)
You

question 12

Multiple Choice

Exhibit 8.7
Use the Information Below for the Following Problem(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.
$\begin{array}{ccccc}\text { Stock } & \text { Beta } & \begin{array}{c}\text { Current } \\\text { Price }\end{array} & \begin{array}{c}\text { Expected } \\\text { Price }\end{array} & \begin{array}{c}\text { Expected } \\\text { Dividend }\end{array} \\\hline \mathrm{A} & 1.5 & \$ 10 & \$ 11.50 & \$ 1.00 \\\mathrm{~B} & 1.1 & \$ 27 & \$ 30 & \$ 0.00 \\\mathrm{C} & 0.8 & \$ 35 & \$ 36 & \$ 1.50\end{array}$

-Refer to Exhibit 8.7.What are the estimated rates of return for the three stocks (in the order A,B,C) ?

• A) 13.0%, 10.6%, 8.8%
• B) 15.0%, 11.1%, 2.9%
• C) 18.7%, 11.1%, 8.8%
• D) 21.7%, 10.0%, 6.9%
• E) 25.0%, 11.1%, 7.1%

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Definitions:

Net Income

The total profit of a company after all expenses and taxes have been deducted from revenues.

Deferred Taxes

are taxes that are accumulated due to temporary differences between the accounting income and taxable income, and will be paid or received in the future.

Consolidated Statement

Financial statements that aggregate the financials of a parent company and its subsidiaries, presenting the finances as if the group were a single entity.

Cost Method

An accounting approach where investments are recorded at their acquisition cost, without adjusting for changes in market value unless there is a decline in value judged to be other than temporary.