honeycfa

If the risk-free rate is 5%, the market rate is 12%, and the beta of a stock is 0.5, what would happen to the required rate of return if the inflation premium increased by 2%? It would:

A) increase to 10.5.

B) increase to 15.

C) remain the same.

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k₀ = 5 + 0.5(12 – 5) = 8.5; k₁ = 7 + 0.5(14 – 7) = 10.5

honeycfa

Which of the following statements concerning security valuation is least accurate? The:

A) required rate of return for the dividend discount model is influenced by inflation.

B) real risk-free rate is the nominal risk-free rate times the expected inflation rate.

C) dividend discount model assumes that the required rate of return is greater than the growth rate of the company's dividend.

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The real risk-free rate equals (1 + nominal risk-free rate) / (1 + expected inflation rate) minus one.