Which of the Following Statements Is CORRECT

question 120

Multiple Choice

Which of the following statements is CORRECT?

• A) If a company with a high beta merges with a low-beta company,the best estimate of the new merged company's beta is 1.0.
• B) Logically,it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks,especially if the projects are closely associated with research and development activities.
• C) The beta of an "average stock," which is also "the market beta," can change over time,sometimes drastically.
• D) If a newly issued stock does not have a past history that can be used for calculating beta,then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm.
• E) During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects,the calculated historical beta may be drastically different from the beta that will exist in the future.

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Definitions:

Effect Size

A statistical measure that indicates the strength of the difference or relationship between two variables in a numerical scale.

External Financing

Funds that a company secures from outside sources, such as loans, lines of credit, or the sale of equity, to support its operations and growth.

Financing Need

Refers to the amount of funding required by an entity to carry out its operations, investments, or to cover its expenses.

Equity

The ownership interest in a company, represented by the shares held by investors.