Question

Which of the following statements is/are true?   Multiple Choice A. All else held constant, if a...

Which of the following statements is/are true?  

Multiple Choice

  • A. All else held constant, if a company has a beta of 1.2, then the cost of equity for this company will increase if the risk-free rate decreases.

  • B. If you assume a company has debt, then an increase in the tax rate will decrease the weighted average cost of capital for the company.

  • Both A and B are true.

  • Neither are true

Homework Answers

Answer #1

Using CAPM, expected return on stock is

E(r) = Rf + beta*(Rm - Rf)

at beta = 1.2

E(r) = Rf + 1.2*(Rm - Rf) = 1.2*Rm - 0.2*Rf

So, if risk free rate Rf decreases in the above formula, E(r) will increase hence statement A is correct.

Weighted average cost of capital is found using formula

WACC = Wd*Kd*(1-T) + We*Ke

When tax rate T increase, first term of the formula decreases. If everything else is constant, WACC will decrease. So, statement is correct.

Hence Both A and B are true.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Which of the following statements is/are true?   Multiple Choice A. All else held constant, if a...
Which of the following statements is/are true?   Multiple Choice A. All else held constant, if a company has a beta of 1.2, then the cost of equity for this company will increase if the risk-free rate decreases. B. If you assume a company has debt, then an increase in the tax rate will decrease the weighted average cost of capital for the company. Both A and B are true. Neither A nor B are true.
1. Assuming all else is constant, which of the following statements is CORRECT? a. Other things...
1. Assuming all else is constant, which of the following statements is CORRECT? a. Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond. b. Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases. c. Other things held constant, for any given maturity, a 1.0 percentage point decrease in the...
Which of the following statements is/are true?   Multiple Choice A. The unplanned increase in the variable...
Which of the following statements is/are true?   Multiple Choice A. The unplanned increase in the variable costs for a company is an example of an unsystemic risk. B. The unexpected theft of intellectual property of a high-tech company is an example of unsystemic risk. Both A and B are true. Neither A nor B are true.
Which of the following statements is/are true?   Multiple Choice A. The unplanned increase in the variable...
Which of the following statements is/are true?   Multiple Choice A. The unplanned increase in the variable costs for a company is an example of an unsystemic risk. B. The unexpected theft of intellectual property of a high-tech company is an example of unsystemic risk. Both A and B are true. Neither A nor B are true.
All else constant, which one of the following will increase a firm's cost of equity if...
All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2. rev: 08_04_2017_QC_CS-95077 A reduction in the dividend amount. An increase in the dividend amount. A reduction in the market rate of return. A reduction in the firm's beta. An increase in the risk-free rate.
Which one of the following statements is correct, all else held constant?                      a. There is an...
Which one of the following statements is correct, all else held constant?                      a. There is an inverse relationship between the present value and the future value.                      b. The future value decreases as the time period increases.                      c. The interest rate is directly related to the present value.                      d. The present value increases as the time period decreases.
Which of the following is not true about CAPM? Multiple Choice Not all assumptions of CAPM...
Which of the following is not true about CAPM? Multiple Choice Not all assumptions of CAPM are realistic CAPM allows for multiple sources of systematic risk The expected return of a security with a beta of zero is the risk-free rate Expected returns increase with higher beta
Which of the following statements is/are true?   Multiple Choice A. The rate of return required by...
Which of the following statements is/are true?   Multiple Choice A. The rate of return required by the market on a bond that is held until maturity is called the coupon rate. B. A zero coupon bond is one that initially sells at a discount and only makes one payment to bondholders. Both A and B are true. Neither A nor B are true.
Assuming all else is constant, which of the following statements is CORRECT? Answers: a. Price sensitivity...
Assuming all else is constant, which of the following statements is CORRECT? Answers: a. Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases. b. A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond. c. For any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a larger dollar capital gain than...
Which of the following statements is true with respect to beta? Multiple Choice A - All...
Which of the following statements is true with respect to beta? Multiple Choice A - All of the above. B-- A stock with a beta > 1 is more volatile than the market portfolio. C -- The market portfolio has a beta of "0". D -- A stock with a beta < 1 will outperform the market portfolio when the market is up.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT