Capital Budgeting and Financial Analysis Questions
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1. What are the three factors that influence the required rate of return by investors? What two components make up the required rate of return on common stock?
2. What is risk premium and what were the risk premium on stocks and the maturity premium on treasury bonds for the ten year period? How is this determined?
3. What are some ethical considerations of accounting and finance? If you follow all applicable rules and regulations, are you an ethical person? Why do many business managers feel that ethical behavior is essential to the profitability and survival of their firm?
4. What information does a company's cash flow statement provide that is not available from the other financial statements? Be specific and cite at lease one example.
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This solution provides a detailed discussion of a series of questions regarding capital budgeting and financial analysis.
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Answer:
1. What are the three factors that influence the required rate of return by investors? What two components make up the required rate of return on common stock?
The three factors that influence the required rate of return by investors are:
(a) Required real rate of return (Risk free rate of return)
(b) Inflation premium
(c) Risk premium
The two components that make up the required rate of return on common stock are required real rate of return and the risk premium.
2. What is risk premium and what were the risk premium on stocks and the maturity premium on Treasury Bonds for the ten year period? How is this determined?
Risk premium is the amount of return that an investor gets on taking the extra risk as ...
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- MBA, Indian Institute of Finance
- Bsc, Madras University
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