T/F 1Risk return theory states that the higher the risk, the higher the required
ID: 2773593 • Letter: T
Question
T/F
1Risk return theory states that the higher the risk, the higher the required return.
2The present value of $50,000 to be received 10 years from now at 8% interest is about $23,160.
3The current share price is $25, most recent dividend is $1.25, so dividend yield is 5%.
4Net income is $2 million. A $1.20 dividend is paid to the 1 million shareholders. Retained earnings is $200,000.
5Present value for a cash flow stream of $300 per year for 5 years at 3% is $1373.91.
6 If an additional $1,000,000 in income is earned and the marginal tax is 34% an additional $340,000 in taxes will be paid.
Explanation / Answer
Question 1 TRUE 2 TRUE Present Value = 50000 x 1/(1.08^10) =50,000 x 0.463193 =23159.67 3 TRUE Yield =1.25/25 x 100 = 5% 4 FALSE Net Income $ 2,000,000.00 Less:Dividend paid $ 1,200,000.00 Retained Earnings $ 800,000.00 5 TRUE Year Cash pv factor at 3% PV 1 300 0.970873786 291.26 2 300 0.942595909 282.78 3 300 0.915141659 274.54 4 300 0.888487048 266.55 5 300 0.862608784 258.78 Total 1373.91 6 TRUE Tax =1,000,000 x 34% = 340,000.
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