The Risk-Free Rate Is 6%;Stock a Has a Beta of 1.0;Stock

question 34

Multiple Choice

The risk-free rate is 6%;Stock A has a beta of 1.0;Stock B has a beta of 2.0;and the market risk premium,r_M - r_RF,is positive.Which of the following statements is CORRECT?

• A) If the risk-free rate increases but the market risk premium stays unchanged,Stock B's required return will increase by more than Stock A's.
• B) Stock B's required rate of return is twice that of Stock A.
• C) If Stock A's required return is 11%,then the market risk premium is 5%.
• D) If Stock B's required return is 11%,then the market risk premium is 5%.
• E) If the risk-free rate remains constant but the market risk premium increases,Stock A's required return will increase by more than Stock B's.

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Definitions:

Time Value

The concept that money available in the present is worth more than the same amount in the future due to its earning capacity.

Payback Period

A way to determine the duration required for an investment to reach a point where returns equal the costs, providing a simple tool for evaluating project viability.

Net Cash Flow

The difference between a company’s cash inflows and outflows over a specific period, indicating its financial health.

Non-Cash Revenues

Revenues earned by a business for which no cash is received, typically recognized through bartering, trading, or other non-cash exchanges.