You discover an investment costing $3,000 which has an expected total return of 15% pa, but a required return of only 11% pa. Of the 15% pa total expected return, the capital return is expected to be 8% pa. Assume that the required return of 11% remains constant, the dividends can only be re-invested at 11% pa and all returns are given as effective annual rates. Which of the following statements is NOT correct? a. When plotted on the Security Market Line, the investment would have a positive alpha. b. You would use a discount rate of 11% to find the NPV of this investment c. The expected dividend return is 7% d. The investment’s price at time t=20 would be $49,099.61 e. The investment is currently under-priced
You discover an investment costing $3,000 which has an expected total return of 15% pa, but a required return of only 11% pa. Of the 15% pa total expected return, the capital return is expected to be 8% pa. Assume that the required return of 11% remains constant, the dividends can only be re-invested at 11% pa and all returns are given as effective annual rates. Which of the following statements is NOT correct? a. When plotted on the Security Market Line, the investment would have a positive alpha. b. You would use a discount rate of 11% to find the NPV of this investment c. The expected dividend return is 7% d. The investment’s price at time t=20 would be $49,099.61 e. The investment is currently under-priced
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 5PB: Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated...
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You discover an investment costing $3,000 which has an expected total return of 15% pa, but a required return of only 11% pa. Of the 15% pa total expected return, the capital return is expected to be 8% pa. Assume that the required return of 11% remains constant, the dividends can only be re-invested at 11% pa and all returns are given as effective annual rates.
Which of the following statements is NOT correct?
a.
When plotted on the Security Market Line, the investment would have a positive alpha.
b.
You would use a discount rate of 11% to find the
c.
The expected dividend return is 7%
d.
The investment’s price at time t=20 would be $49,099.61
e.
The investment is currently under-priced
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