A Stock Is Expected to Return 13 Percent in an Economic

question 13

Multiple Choice

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy.Which one of the following will lower the overall expected rate of return on this stock?

• A)An increase in the rate of return in a recessionary economy
• B)An increase in the probability of an economic boom
• C)A decrease in the probability of a recession occurring
• D)A decrease in the probability of an economic boom
• E)An increase in the rate of return for a normal economy

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Definitions:

Project Evaluation

The process of determining the potential successes or failures of a proposed project based on various criteria.

DCF Approach

A valuation method that estimates the value of an investment based on its expected future cash flows, adjusted for the time value of money.

Cost of Equity

The return that investors expect for investing in a company's equity, considering the risk of the investment.

Retained Earnings

The portion of a company's profits that is kept or retained for reinvestment in the business, rather than being paid out as dividends.