CFA Level I · CFA Level I Exam · Sources of Equity Returns
An analyst uses the build-up method to estimate the required return on equity for a small private company. The government bond yield is 3.0%, the equity risk premium is 5.0%, the size premium is 1.5%, and the company-specific premium is 2.0%. The required return is closest to:
The required return is about 11.5%. The build-up method adds the risk-free rate of 3.0%, the equity risk premium of 5.0%, the size premium of 1.5% and the company-specific premium of 2.0% to reach 11.5%.
- A8.0%
- B10.0%
- C11.5%Correct
Explanation
Build-up: 3.0 + 5.0 + 1.5 + 2.0 = 11.5%. The 10.0% result omits the size premium and company-specific premium partly (3+5+2), and 8.0% omits both premia.
Did you get it right without looking?
One question tells you little. A timed set on Sources of Equity Returns shows your real accuracy, how long you take and where you lose marks.
More Sources of Equity Returns questions
- Compared with a historical estimate of the equity risk premium, a forward-looking (supply-side) estimate is most likely to:
- An investor buys a share at $25.00. After six months the share pays a dividend of $1.00, which is immediately reinvested at the then-current…
- An investor buys a share for $40.00, receives dividends of $1.20 during the year, and sells the share for $42.00 at year-end. The investor's…
- A company announces a 2-for-1 stock split. Holding all else equal, the split most likely changes an existing shareholder's total return from…
- An analyst argues that the contribution of P/E expansion to equity returns is least likely to be sustainable over long horizons. The most ap…
- An investor buys one share at 100.00. After six months it pays a dividend of 3.00, reinvested at 96.00 per share. At the end of the year the…