A Very Large fiRm Has a Debt Beta of Zero

question 2

Multiple Choice

A very large firm has a debt beta of zero.If the cost of equity is 11%, and the risk-free rate is 5%, the cost of debt is:

• A)5%
• B)6%
• C)11%
• D)15%
• E)It is impossible to tell without the expected market return.

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Definitions:

Accounting Standards

Rules and guidelines set by authoritative bodies that dictate how financial transactions and statements should be reported and maintained.

Dividends

Payments made by a corporation to its shareholders, usually as a distribution of profits.

Subsidiary

A company that is completely or partly owned and partly or wholly controlled by another company, known as the parent company.

Parent

In business and accounting, a parent entity controls one or more subsidiary entities.