Which of the following statements concerning the required rate of return on stocks is true?
A) If risk is reduced, the required return will decrease because more investors are risk-averse.
B) The higher the risk, the higher the required return, other things being equal.
C) The required return on preferred stock is generally higher than the required return on
common stock.
D) The higher an investor's required rate of return, the higher the value of the stock.
Question 2
Redrock Inc. is a household products firm that is considering developing a new detergent. In
evaluating whether to go ahead with the new detergent project, which of the following statements
is MOST correct?
A) The company will need to hire 10 new workers whose salaries and benefits will total 400,000
per year. Labor costs are not part of capital budgeting and should be excluded.
B) The company will need to use some equipment that it could have leased to another company.
This equipment lease could have generated 200,000 per year in after-tax income. The
200,000 should be excluded because the equipment can no longer be leased.
C) The company will produce the detergent in a building that it renovated 2 years ago for
300,000. The 300,000 should be excluded from the analysis.
D) The company will produce the detergent in a building that they already own. The cost of the
building is therefore zero and should be excluded from the analysis.
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