Question

If a market is efficient, then the difference between the market value of an investment and...

If a market is efficient, then the difference between the market value of an investment and its cost is:

Select one:

a. Positive and greater than 1.

b. Equal to the risk-free rate of return.

c. Equal to the risk premium.

d. Zero.

e. Equal to the net present value of the cash inflows.

Homework Answers

Answer #1

Option D

Efficient market means a market wherein the current prices reflects the position of the market.

The net present value of an investment is the difference between the market value of an investment and its cost. In an efficient market, the NPV is zero.

This is because, in an efficient market, the information regarding an investment is immediately reflected in its prices. Therefore, there are no chances for an investment to be under-valued or over-valued.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
11. The discount rate that makes the net present value of an investment exactly equal to...
11. The discount rate that makes the net present value of an investment exactly equal to zero is the: A) Payback period. B) Internal rate of return. C) Average accounting return. D) Profitability index. E) Discounted payback period. 12. The internal rate of return (IRR) rule can be best stated as: A) An investment is acceptable if its IRR is exactly equal to its net present value (NPV). B) An investment is acceptable if its IRR is exactly equal to...
Assume that the market is informatively efficient. You will find that one bond is at a...
Assume that the market is informatively efficient. You will find that one bond is at a discount. Which of the following applies if you invest in this bond at its market price? Select one: a. The return on investment is expected to remain negative in the long run. b. The NPV of the investment is expected to be positive. c. The NPV of the investment is expected to be zero. d. The value of the investment is expected to remain...
1. The internal rate of return identifies: A. the minimum acceptable discount rate. B. the cost-benefit...
1. The internal rate of return identifies: A. the minimum acceptable discount rate. B. the cost-benefit ratio. C. the average profit from a project. D. none of the given answers. 2. The net present value rule states that you should accept a project if the NPV: A. is equal to zero or negative. B. exceeds the required rate. C. is less than 1.0. D. is positive. 3. A net present value of zero implies that an investment: A. has an...
Which of the following statements applies to the so-called in a frictionless world suggested by Modigliani...
Which of the following statements applies to the so-called in a frictionless world suggested by Modigliani & Miller? Select one: a. Repurchases of treasury shares have no effect on the value of the company. b. In principle, a company should not distribute funds out to its owners. c. The dividend payment lowers the market price of the share. d. Selling shares in the market is not a tax-efficient way to turn your shareholding into cash. According to the Capital Asset...
Which one of the following statements is correct? Net present value is equal to an investment's...
Which one of the following statements is correct? Net present value is equal to an investment's cash inflows discounted to today's dollars. The net present value is positive when the required return exceeds the internal rate of return. The net present value is a measure of profits expressed in today's dollars. If the internal rate of return equals the required return, the net present value will equal zero. If the initial cost of a project is increased, the net present...
Question 1:All of the following are considered cash inflows except the: A. future residual value of...
Question 1:All of the following are considered cash inflows except the: A. future residual value of the capital investment B. future additional operating costs of the investment C. future savings in ongoing cash operating costs D. future cash revenue generated by the investment Question 2:Capital budgeting methods which incorporate the time value of money include the A. average rate of return B. accounting rate of return C. net present value method D. payback method Question 3: Net present value is...
Med, Inc. is a specialty firm in the medical equipment field with a cost of capital...
Med, Inc. is a specialty firm in the medical equipment field with a cost of capital of 13.7 percent. With the aging of America, the firm recognize the opportunities that exist in the medical field and is considering expansion in this area. At present, there is an opportunity for the firm to be involved in a new medical devices project. The project will require an initial investment of $8.4 million with annual returns of $2.2 million per year for seven...
A stock has a required return of 14%, the risk-free rate is 7.5%, and the market...
A stock has a required return of 14%, the risk-free rate is 7.5%, and the market risk premium is 3%. What is the stock's beta? Round your answer to two decimal places. If the market risk premium increased to 6%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places. If the stock's beta is less than 1.0,...
A stock has a required return of 16%, the risk-free rate is 5.5%, and the market...
A stock has a required return of 16%, the risk-free rate is 5.5%, and the market risk premium is 3%. What is the stock's beta? Round your answer to two decimal places. If the market risk premium increased to 7%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places. If the stock's beta is greater than 1.0,...
A stock has a required return of 11%, the risk-free rate is 4.5%, and the market...
A stock has a required return of 11%, the risk-free rate is 4.5%, and the market risk premium is 4%. What is the stock's beta? Round your answer to two decimal places. If the market risk premium increased to 7%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places. If the stock's beta is greater than 1.0,...