If Expected Return Is Less Than Required Return on an Asset

question 6

Multiple Choice

If expected return is less than required return on an asset, rational investors will ________.

• A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return
• B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return
• C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return
• D) buy the asset, since price is expected to increase

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Definitions:

Product Costs

The total costs directly tied to the creation of a product, encompassing direct labor, direct materials, and manufacturing overhead.

Period Costs

Expenses that are not directly tied to production activities and are accounted for as expenses in the period they are incurred, such as selling, general, and administrative expenses.

Conversion Costs

The sum of direct labor and manufacturing overhead costs, representing the total expenses necessary to transform raw materials into finished goods.

Materials Purchased

This refers to the raw materials bought by a company for the production of goods.