Question

Consider the following statements:
Statement 1: Analysts prefer using the arithmetic mean over using the geometric mean to compute the historical equity market risk premium.
Statement 2: Analysts prefer using the long-term government bond yield over the short-term government bond yield as the risk-free rate when computing the historical equity market risk premium.
Which of the following is most likely?

Select one:

a. Only Statement 1 is correct.

b. Only Statement 2 is correct.

c. Both statements are incorrect.

Which of the following is most likely regarding the Fama-French model?

Select one:

a. The smaller the company and the greater the book-to-market ratio, the greater the required return.

b. The larger the company and the lower the book-to-market ratio, the greater the required return.

c. The smaller the company and the lower the book-to-market ratio, the greater the required return.

Which of the following is not a factor used when forecasting with the FCFF and FCFE modeling techniques?

Select one:

a. Noncash charges

b. Pretax operating income

c. Investments in fixed and working capital

Answer 1

1) b) only statement 2 is correct.

Reason : statement 1 is incorrect as geometric mean is prefer by analyst to compute historical equity market risk premium.

2) a) The smaller the company and greater the book market ratio the greater the required required return.

3) b) Pretax operating income

Reason : non cash charges & investments in fixed & working capital are used when forcasting with the FCFF & FCFE modeling techniques.