Firm M's Earnings and Stock Price Tend to Move Up

question 30

Multiple Choice

Firm M's earnings and stock price tend to move up and down with other firms in the S&P 500, while Firm W's earnings and stock price move counter cyclically with M and other S&P companies. Both M and W estimate their costs of equity using the CAPM, they have identical market values, their standard deviations of returns are identical, and they both finance only with common equity. Which of the following statements is CORRECT?

• A) M should have the lower WACC because it is like most other companies, and investors like that fact.
• B) M and W should have identical WACCs because their risks as measured by the standard deviation of returns are identical.
• C) If M and W merge, then the merged firm MW should have a WACC that is a simple average of M's and W's WACCs.
• D) Without additional information, it is impossible to predict what the merged firm's WACC would be if M and W merged.
• E) Since M and W move counter cyclically to one another, if they merged, the merged firm's WACC would be less than the simple average of the two firms' WACCs.
• Multiple Choice: Problems

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Definitions:

Gender Gap

The disparities between men and women in various aspects of society, including but not limited to, income, career advancement opportunities, and political representation.

Domestic Labour

Work performed within the home, such as cleaning, cooking, and childcare, traditionally without economic compensation.

Extended Family

An extended family includes not just parents and their children but also other relatives such as grandparents, aunts, uncles, and cousins living together or maintaining close relationships.

Nuclear Family

A family unit consisting of two parents and their children living in one household, considered the traditional family structure.