A Stock Has an Average Historical Risk Premium of 5

question 30

Multiple Choice

A stock has an average historical risk premium of 5.6 percent.The expected risk-free rate for next year is 2.4 percent.What is the expected rate of return on this stock for next year?

• A) 6.50 percent
• B) 7.53 percent
• C) 8.00 percent
• D) 9.34 percent
• E) 11.70 percent

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Definitions:

Fixed Expenses

Costs that do not change with the level of production or sales within a certain range, such as rent and salaries.

Absorption Costing

An accounting method that includes all direct and indirect manufacturing costs in the cost of a product.

Net Operating Income

The income a company makes from its main business activities before subtracting any costs for interest and taxes.

Fixed Manufacturing Overhead

The portion of manufacturing overhead costs that remains constant irrespective of the level of production, such as salaries of supervisors and rent for the factory building.