Equity Investments - Equity Investments Section 2
26. Which of the following measures is relatively simple to calculate?
- Option : A
- Explanation : It is relatively simple to calculate the cost of debt – the interest or coupon the company is obligated to pay its bondholders is the cost it incurs.
- Option : A
- Explanation : Selling unproductive assets and using the proceeds from the sale to buy back shares reduces the total assets. Holding sales constant the decrease in assets would improve the asset turnover. Buying back shares increases the firm’s financial leverage. Both the increase in asset turnover and financial leverage will lead to a higher return on equity.
| Risk-free rate | 2.50% |
| Market risk premium | 4.30% |
| Stock’s beta | 1.9 |
| Manager’s expected rate of return | 9.55% |
| Company’s weighted average cost of capital | 9.25% |
Based on this information, which of the following would be most appropriate investment decision for the fund manager?
- Option : B
- Explanation : Stock’s required return according to CAPM = risk free rate + beta * market risk premium = 0.025 + 1.9 * 0.043 = 10.67%. Since the stock’s required return (10.67%) is greater than the expected rate of return (9.55%), the correct decision is to not invest.
29. Industry analysis is most useful to those who are engaged in:
- Option : C
- Explanation : Indexing and passive investing strategies would not engage in over- or underweighting of industries, industry rotation, or timing investments in industries. Therefore, industry analysis is not useful to such investors or portfolio managers. Performance attribution, which addresses sources of a portfolio’s returns, utilizes industry analysis and classification.
30. Which of the following is least likely a use of industry analysis?
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