Use the Security Market Line to Determine the Required Rate

question 85

Multiple Choice

Use the security market line to determine the required rate of return for the following firm's stock.The firm has a beta of 0.80,the required return in the market place is 12.50%,and the risk-free rate of return is 3.50%.

• A)13.50%
• B)10.70%
• C)7.20%
• D)2.80%

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Definitions:

Indirect Method

A method of computing the net cash provided by operating activities that starts with net income and adjusts it to a cash basis.

Operating Activities

These are the day-to-day actions that are involved in running a business which affect the cash flow but are not investing or financing activities.

Investing Activities

These activities generate cash inflows and outflows related to acquiring or disposing of noncurrent assets such as property, plant, and equipment, long-term investments, and loans to another entity.

Cash Outflow

Money or financial resources leaving a business, typically for expenses, investments, or other payments.