The Market Value of Charcoal Corporation's Common Stock Is $20

question 44

Multiple Choice

The market value of Charcoal Corporation's common stock is $20 million, and the market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8%. If the Treasury bill rate is 5%, what is the company's cost of capital? (Assume no taxes.)

• A) 15%
• B) 14.6%
• C) 13%
• D) None of the above

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Definitions:

Contractual Capacity

The legal ability to enter into a binding agreement.

Agency Relationship

represents a legal arrangement where one party, the agent, acts on behalf of another party, the principal, in dealing with third parties.

Express Authority

Explicitly given power or authority to an agent or representative by a principal to perform specific acts or functions on their behalf.

Apparent Authority

A doctrine in contract law that allows a third party to hold a principal liable for the acts of an agent, if the principal's actions lead the third party to reasonably believe that the agent is authorized.