Which of the Following Statements Is CORRECT

question 32

Multiple Choice

Which of the following statements is CORRECT?

• A) Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities.
• B) The beta of an "average stock, " which is also "the market beta, " can change over time, sometimes drastically.
• C) If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm.
• D) During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future.
• E) If a company with a high beta merges with a low-beta company, the best estimate of the new merged company's beta is 1.0.

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Definitions:

Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

Payout Ratios

Payout ratios indicate the proportion of earnings a company pays to its shareholders in the form of dividends, usually expressed as a percentage of net income.

Price-Earnings Ratio

A valuation ratio of a company's current share price compared to its per-share earnings (EPS), used to evaluate if a stock is under or overvalued.

Percentage Change

Percentage change refers to the measure of the degree of change over time, calculated as the difference between two values divided by the original value, times 100.