The Risk-Free Rate Is 6%; Stock a Has a Beta

question 84

Multiple Choice

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, r_M − r_RF, is positive.Which of the following statements is CORRECT?

• A) Stock B's required rate of return is twice that of Stock A.
• B) If Stock A's required return is 11%, then the market risk premium is 5%.
• C) If Stock B's required return is 11%, then the market risk premium is 5%.
• D) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.
• E) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

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Definitions:

Weighted Average Cost

The combined cost of both variable and fixed goods, services, or sources of finance, weighted according to their proportions.

Bond Issues

The process of offering bonds to investors, which are debt securities constituting a loan to the issuer from the bondholder.

Cost of Debt

The effective rate that a company pays on its current debt, which can include bonds, loans, and other forms of debt, influencing its capital structure decisions.

Cost of Capital

The rate of return that a company must achieve in order to justify the cost of an investment, often influencing investment decisions.