Question
You discover an investment costing $500 which has an expected total return of 12% pa, but a required return of only 10% pa. Of the
You discover an investment costing $500 which has an expected total return of 12% pa, but a required return of only 10% pa. Of the 12% pa total expected return, the capital return is expected to be 7% pa. Assume that the required return of 10% remains constant, the dividends can only be re-invested at 10% pa and all returns are given as effective annual rates.
Which of the following statements is NOT correct?
a. You would use a discount rate of 10% to find the NPV of this investment
b. When plotted on the Security Market Line, the investment would plot below the SML.
c. The expected dividend return is 5%
d. The investment is currently under-priced
e. The investments price at time t=20 would be $1,934.842
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started