Question

Go Green, Inc. currently pays an annual dividend of $.8 a share. The firm has a beta of 1.2 for its stock. All else equal, according to the security market line approach, the firm's cost of equity will be increased with _________________.

Multiple Choice

• a reduction in the market rate of return

• an increase in the firm's beta

• an increase in the firm's dividend amount

• a reduction in the firm's dividend amount

• an increase in the risk-free rate

Answer 1

Option B an increase in the firm's beta

Security market line equation = Risk-Free Rate of Return + Beta (Market Return - Risk-Free Rate of Return)

Option A is incorrect because if market return reduced then expected return reduces as well

Option C is incorrect because the dividend amount is not considered in security market line

Option D is incorrect because the dividend amount is not considered in security market line

Option E is incorrect because it cause the the risk premium to decrease which in turn reduces expected return

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