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April 2015 Paper Q1 - Opportunity Cost

S

sdraj

Member
Hello,

Could you please explain how the 8% calculated in Q1 of the April 2015 paper?
I don't understand how this ties in with the definition of opportunity cost being the best alternative foregone.

The question is as follows:

A company makes economic profits of 10%. The risk premium for the company's line of business is 5%. If the banks offer a rate of interest on savings accounts of 3%, the opportunity cost to the owners of the company is: A 5%, B 7%, C 8%, D 10%

Thanks!
 
Because, "The normal profit can be expressed in terms of the rate of return foregone by investing capital in the particular business, which can in turn be broken down into the risk-free rate plus a suitable risk premium, reflecting the riskiness of the business."

And more, Risk Premium is the additional income beyond risk-free and it can be earned from like-like risk.

Hence so.
 
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