basic falamptions concerming the relationship between risk and retum are true, t
ID: 2799425 • Letter: B
Question
basic falamptions concerming the relationship between risk and retum are true, then which of following should be true? 19. If the firm is being operated so as to maximize shareholder wealth, and if our a. If the beta of the assetis larger than the fim's beta,then the required return on the asset is less than the required return on the firm. b. If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm. c. If the beta of the asset is greater than the corporate beta prior to the addition of that asset, then the corporate beta after the purchase of the asset will be smaller than the If the beta of an asset is larger than the corporate beta prior to the addition of that original corporate beta. asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase. e. If the beta of an asset is larger than the firm's beta, then the required rate of return is equal to the beta. 20. Which of the followi ing policies represents a compromise between a stable, predictable dividend and a constant payout ratio? a. The Free cash flow policy b. The Residual dividend policy c. The Dividend reinvestment policy d. The Constant payout ratio policy e. The Low regular dividend plus extras policyExplanation / Answer
19. If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase. This is because the higher beta will demand a higher required rate of return on the firm.
Required rate of return = risk free rate + BETA * market risk premium
Higher the beta, higher the required rate of return.
20. In a low regular and extra policy, the firm maintains a low regular dividend, supplemented with an extra cash dividend when justified by higher earnings. This policy is used by companies that have large but temporary increases in earnings.
Low regular dividend plus extras policy is the answer.
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