You discover an investment costing $2,500 which has an expected total return of 12% pa, but...

 

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You discover an investment costing $2,500 which has an expected total return of 12% pa, but a required return of 14% pa. Of the 12% pa total expected return, the capital return is expected to be 8% pa. Assume that the required return of 14% remains constant, the dividends can only be re-invested at 14% pa and all returns are given as effective annual rates. Which of the following statements is NOT correct? а. You would use a discount rate of 12% pa to find the NPV of this investment O b. The investment's price at time t=20, just after the dividend at that time is paid, would be $ 11,652.39 О с. The expected dividend return is 4% pa O d. The investment is currently over-priced e. When plotted on the Security Market Line, the investment would have a negative alpha. You discover an investment costing $2,500 which has an expected total return of 12% pa, but a required return of 14% pa. Of the 12% pa total expected return, the capital return is expected to be 8% pa. Assume that the required return of 14% remains constant, the dividends can only be re-invested at 14% pa and all returns are given as effective annual rates. Which of the following statements is NOT correct? а. You would use a discount rate of 12% pa to find the NPV of this investment O b. The investment's price at time t=20, just after the dividend at that time is paid, would be $ 11,652.39 О с. The expected dividend return is 4% pa O d. The investment is currently over-priced e. When plotted on the Security Market Line, the investment would have a negative alpha.

Answer rating: 100% (QA)

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