ABC Company Share Currently Has a Market Value Equivalent to Its

question 54

Multiple Choice

ABC Company share currently has a market value equivalent to its intrinsic value. Marco perceives that ABC Company is increasing its level of risk and therefore Marco increases his required rate of return on ABC share. This change in the required rate of return

• A) will change the intrinsic value but the direction of the change cannot be determined.
• B) will reduce the intrinsic value of ABC share to Marco.
• C) is a signal to Marco that he should buy more ABC Company share.
• D) will increase the intrinsic value of ABC share to Marco.

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Definitions:

Assets

Economic resources or items of value owned by an individual or organization, including tangible and intangible resources, that can be used to produce positive economic value.

Liquidity

The ease with which an asset or security can be converted into ready cash without affecting its market price.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time, providing a basis for computing rates of return and evaluating its capital structure.

Current Ratio

A financial ratio indicating how well a firm can cover its short-term liabilities with its present assets.