USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 124

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You expect the risk-free rate (RFR) to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks.

-Refer to Exhibit 7.7. What are the estimated rates of return for the three stocks (in the order A, B, C) ?

• A) 13.0 percent, 10.6 percent, 8.8 percent
• B) 15.0 percent, 11.1 percent, 2.9 percent
• C) 18.7 percent, 11.1 percent, 8.8 percent
• D) 21.7 percent, 10.0 percent, 6.9 percent
• E) 25.0 percent, 11.1 percent, 7.1 percent

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Definitions:

Flotation Cost

The total costs associated with issuing new stocks or bonds, including underwriting, legal, and registration fees.

Debt-Equity Ratio

A calculation of a corporation's financial risk, determined by dividing its overall liabilities by the equity of its shareholders.

Initial Cash Outlay

The initial funds required to commence a project or investment, typically including costs such as purchase price and setup expenses.

Pre-Tax Cost

The expense or cost of an item or service before any taxes are applied.