Question

1. Company X has ample excess cash flow on their last 5 income statements, but they do not pay a dividend to shareholders. Which choice below best represents why share holders would be OK with not earning a dividend?

1. The company’s stock has grown by 40% this year
2. The company issues a statement saying they do not believe in dividends
3. The company can earn a greater return than the shareholder

2. Which of the following portfolios is most attractive to investors?

            a.   Risk: 4%; Return: 2%

            b.   Risk: 4%; Return: 10%

            c.   Risk: 7%; Return: 8%

            d.   Risk: 7%; Return 10%

            e.   None of the above investments would attract investors

3. According to the CAPM, what s the required rate of return on the stock “DMI”, given a risk premium of 9%, beta of 1.2x, and a t-bill return of 3%?

1. 14.6%
2. 13.8%
3. 6.7%
4. 11.4%
5. None of the above

Answer 1

1. The answer is-

C. The company can earn a greater return than the shareholder. If the company can retain all the earnings and give a return better than market then it should do so.

2. The answer is-

b. Risk: 4%; Return: 10%

Because it has the lowest risk and highest return.

3. The answer is-

Required rate=Rf+beta*risk premium =3%+1.2*9% =13.8%