An Investor Is Faced with the Decision of Whether to Invest

question 51

Multiple Choice

An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return.Which of the following seems most likely?

• A)the 20% stock is a better investment.
• B)the 14% stock is overpriced.
• C)Both stocks will have approximately the same return.
• D)Both stocks are priced correctly given their perceived risk.

---

Definitions:

Return On Equity Ratio

A measure of financial performance calculated by dividing net income by shareholders' equity, indicating how well a company uses investments to generate earnings growth.

Financial Statements

Official records that outline the financial activities and condition of a business, individual, or other entity, typically including the balance sheet, income statement, and cash flow statement.

Common Shares

Common shares represent ownership in a company and provide shareholders with voting rights and dividends, subject to corporate profitability and decision of the board.

Times Interest Earned Ratio

A financial metric that measures a company's ability to meet its debt obligations based on its earnings before interest and taxes (EBIT).