1 All other things equal a decrease in the equity risk premi

1. All other things equal, a decrease in the equity risk premium leads to a(n):

a. Increase in the required return on stock.

b. Decrease in the present value of stock.

c. Increase in the price of equity shares.

d. Decrease in dividend growth.

2. Which of the following is not one of fundamental characteristics that influence the value of a financial instrument?

a. The current income tax rates

b. The size of the promised payment to be made

c. The likelihood that the payment will be made

d. When the promised payment is to be made

3. If a consol is offering an annual coupon of $25 and the annual interest rate is 4%, the price of the consol is:

Solution

Solution.

c. Increase in the price of equity shares.

Equity Risk Premium is a type of compensation which is investors require to maintain the difference beetwen holding the risky market portfolio and a risk-free bond. Because this compensation depends on the future performance of stocks, the ERP incorporates expectations of future stock market returns, which are not directly observable. At the end of the day, any model of the ERP is a model of investor expectations.