Earnings Sensitivity Analysis Differs from Static GAP Analysis By

question 3

Multiple Choice

Earnings sensitivity analysis differs from static GAP analysis by:

• A) looking at a wide range of interest rate environments.
• B) using perfect interest rate forecasts.
• C) calculating a change in net interest income given a change in interest rates.
• D) Earnings sensitivity analysis differs from static GAP analysis in all of the above ways.
• E) Earnings sensitivity analysis and static GAP analysis do not differ. They are different names for the exact same analysis.

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Definitions:

Cost of Equity

The return a firm theoretically pays to its equity investors as compensation for the risk they undertake by investing in the company, often estimated using models like the Capital Asset Pricing Model (CAPM).

Required Returns

The minimum expected return by investors for investing in a particular asset, taking into account its risk level.

Capital Components

The various sources of funding that a company uses to finance its overall operations and growth, including debt and equity.

Pretax Cost

The expense or cost of an investment or operation before the deduction of taxes.