Question
11a) You are currently evaluating a potential stock purchase. As you are gathering information about the stock you notice a few things. First, you see
11a) You are currently evaluating a potential stock purchase. As you are gathering information about the stock you notice a few things. First, you see that the expected rate of return on the market is 21%, and the risk free rate is 4%. The stock you are interested in has a beta of 1.84, and is currently priced to yield a return on 38% (expected return). If this is true then, what must also be true?
Select one:
a. The stock is fairly priced
b. The stock lies on the SML
c. The stock is overpriced
d. The stock lies below the SML
e. The stock is underprice
11b) If everything else stays the same, then it must be true that as risk (rates) increases, present value (price) must what?
Select one:
Increase.
Decrease.
Rises and then remains stable.
Cannot be determined with the available information.
Does not change.
11c) Consider a profitable company with an asset that costs $6,000,000 that is depreciated straight-line to zero over its 8 year depreciable tax life. The asset is to be used in a 3 year project; at the end of the project, the asset can be sold for $308,000. If the relevant tax rate is 22%, what is the after tax cash flow from the sale of this asset (after-tax salvage)?
Select one:
a. 1022714
b. 1110857
c. 1065240
d. 1017513
e. 1090898
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