Assume That the Risk-Free Rate, RRF, Increases but the Market

question 10

Multiple Choice

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM- rRF) , declines, with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

• A) the required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
• B) since the overall return on the market stays constant, the required return on each individual stock will also remain constant.
• C) the required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.
• D) the required return of all stocks will fall by the amount of the decline in the market risk premium.
• E) the required return of all stocks will increase by the amount of the increase in the risk-free rate.

Understand and calculate the working capital for a given period.

Analyze and compute the average collection period.

Understand and determine the acid-test (quick) ratio.

Analyze and calculate the current ratio.

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Definitions:

Unused Capacity

The portion of a company's production potential that is not being utilized to manufacture goods or provide services.

Estimated Activity

An approximation of the amount of work or level of effort needed for a particular task or project.

Activity at Capacity

The level of operational activity that a company can achieve using its current resources without incurring additional costs.

Machine-Hours

A measure of the amount of time machines are used in the production process, often related to the allocation of manufacturing overhead.