A firm has a return on equity of 12.4% according to the dividend growth model and a return of 18.7% according to the capital asset pricing model. The market rate of return is 13.5%. What rate should the firm use as the cost of equity when computing the firm's weighted average cost of capital (WACC)?

Select one:

a.12.4% because it is lower than 18.7%

b.18.7% because it is higher than 12.4%

c.The arithmetic average of 12.4% and 18.7%

d.The arithmetic average of 12.4%, 13.5% and 18.7%

e.13.5%

The concept of investors being risk averse means that

Select one:

a.investors will always prefer an investment that carries less risk.

b.investors require higher returns to compensate for carrying more risk.

c.investors will make all possible attempts to avoid systematic risk.

d.the investments risk is the predominant feature considered by the investor.

The Reserve Bank of Australia expects the inflation rate in Australia to be 4.50% and financial analysts evaluate the risk-premium on small company shares to be 3.70% for the year. The Commonwealth Government's T-notes yield is expected to be 8% for the next year. What rate of return is expected to be earned on small-company shares over the next year?

Select one:

a.8.20%

b.4.50%

c.11.20%

d.11.70%