Use the Information for the Question(s)below

question 68

Multiple Choice

Use the information for the question(s) below.
Consider an economy with two types of firms: S and U. The S firms always move together, but U firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.
-What is the expected return for an individual firm?

• A)14%
• B)5%
• C)3%
• D)-5%

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Definitions:

Net Income

Net income refers to the total earnings of a company once all costs, expenses, and taxes are deducted from the overall revenue.

Debt-to-Total-Assets Ratio

The debt-to-total-assets ratio measures the percentage of a company's assets financed by creditors, indicating the degree of financial leverage.

Du Pont Equation

A formula that breaks down the components of a company's return on equity into three parts: operating efficiency, asset use efficiency, and financial leverage.

ROE

Return on Equity; a measure of financial performance calculated by dividing net income by shareholder's equity, indicating how well a company uses investments to generate earnings growth.