You Recently Purchased a Share That Is Expected to Earn

question 105

Multiple Choice

You recently purchased a share that is expected to earn 12% in a booming economy,8% in a normal economy and lose 5% in a recessionary economy.There is a 15% probability of a boom,a 75% chance of a normal economy,and a 10% chance of a recession.What is your expected rate of return on this share?

• A)5.00%
• B)6.45%
• C)7.30%
• D)7.65%
• E)8.30%

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Definitions:

Lessor

The party who rents or leases property to another; the owner of the property being rented or leased.

After-Tax Cost of Debt

The net cost to a company for borrowing funds after adjusting for the tax deductibility of interest payments.

Marginal Tax Rates

The rate at which the last dollar of income is taxed, thereby representing the rate of tax applied to each additional dollar of income.

Lease Payments

Regular payments made by the lessee to the lessor for the use of an asset.