Dixon Food's Stock Has a Beta of 1

question 31

Multiple Choice

Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7 Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM − rRF) , equals 4% Which of the following statements is CORRECT?

• A) If the market risk premium increases but the risk-free rate remains unchanged, Dixon's required return will increase because it has a beta greater than 1.0 but Clark's required return will decline because it has a beta less than 1.0.
• B) Since Dixon's beta is twice that of Clark's, its required rate of return will also be twice that of Clark's.
• C) If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.
• D) If the market risk premium decreases but the risk-free rate remains unchanged, Dixon's required return will decrease because it has a beta greater than 1.0 and Clark's will also decrease, but by more than Dixon's because it has a beta less than 1.0.
• E) If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Dixon since it has a higher beta.

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Definitions:

Activity-Based Costing

A duplicate term; an accounting method that identifies and assigns costs to overhead activities and then links those costs to products, providing detailed information on where a company is incurring costs and why.

Manufacturing Overhead

All indirect costs associated with the production process, including but not limited to utilities, maintenance, and salaries of support staff.

Traditional Costing System

is an accounting method that applies indirect costs to products based on a predetermined rate, often not reflecting actual usage of resources.

Direct Labor-Hours

The total hours of labor directly involved in producing goods or performing services.