Question

Which of the following statements is/are correct?

1.An increase in the cost of equity leads to fall in share price.

2.Investors faced with increased risk will expect increased return as compensation.

3.The cost of debt is usually lower than the cost of preference shares

Select one:

a. 2 only

b. 1 and 3 only

c. 2 and 3 only

d. 1,2 and 3

Answer 1

Correct Option is D
All the three statements are right.
Share price is calculated by Dividend Discount model = D1 / Re -g
If the Re is increasing numerator will decrease therfore share price will fall.

HIgher the risk, higher the return. If the investor wants the higher return they have bear the higher risk.

Generally, cost of debt is lower than the cost of preference share and cost of equity share.
While liquidate the company, first payment made to debtholders remaning payment made to preference shareholder then equity shareholders.
Ke>Kp>Kd.

I hope this clear your doubt.

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