Suppose There Is a Reduction of the Return Provided on U.S.Treasury

question 35

Multiple Choice

Suppose there is a reduction of the return provided on U.S.Treasury bonds.We should expect the current price of stocks to:

• A)Increase since the risk-free return is now lower.
• B)Decrease since U.S.Treasury bonds are safer.
• C)Increase since the risk premium on the stocks will increase.
• D)Stay the same; there is no effect on stock prices from this reduction.

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Definitions:

Pretax Income

The income of a company before taxes are deducted, used to assess profitability before tax expenses are applied.

Margin of Safety

The difference between actual sales and break-even sales, measuring the risk of not reaching the break-even point.

Budgeted Income Statement

A financial statement forecasting the revenues, expenses, and net income for a specific period, based on proposed budgets and assumptions.

Contribution Margin Ratio

A financial metric that measures the proportion of sales revenue that exceeds variable costs, indicating how much contributes to covering fixed costs and generating profit.