Question????

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satyaa

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If the total capital expenditure amount increases for a stock index, which of the following will occur? Earnings per share (EPS):
A) increases due to a decline in interest expense, and expected return of the index declines.
B) declines due to an increase in interest expense, and expected return of the index increases.
C) increases due a decline in depreciation expense, and expected return of the index increases.
D) declines due to an increase in depreciation expense, and expected return of the index declines.

What does Capital Expenditure for a Stock Index mean?

Thanks for your help.
 
That is what threw me off. And then the options talk about depreciation expense. I don't understand this question and have no clue about it ...

Thanks
 
are you sure your looking into level 1 questions - this seems like something for lvl 2.
 
I just have the level1 Schweserpro Cd (2005 version) ......
 
They do have the solutions it is just that I have to upload the questions to see the solutions ....
 
Should be "D".

The question is asking about EPS effect, or more simply just earnings effect (Net Income).

When you increase your CapEx, your total depreciation is supposed to increase (you build a factory with your CapEx money and that thing starts to depreciate). You include your increased Depreciation into the Income Statement, which effectively reduces your Net Income. Hence, EPS goes down and index (initially at least) decreases.
 
D is the only one that makes sense, since there is no referece to timeframe you can assume that they are referring to the shortrun, so EPS would decrease as follows: NI - Dep(1-T) / Shares. In the long run however I would say EPS would increase as new machines would be added that are more efficient and this in and of itself would increase EPS, but since this is not an option you can assume they are refering to the shortrun, so the answer is D.
 
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