Assume Russo's Has a Debt-Equity Ratio of

question 17

Multiple Choice

Assume Russo's has a debt-equity ratio of .4 and uses the capital asset pricing model to determine its cost of equity. As a result, the company's cost of equity:

• A) is affected by the firm's rate of growth projections.
• B) implies that the firm pays out all of its earnings to its shareholders.
• C) is dependent upon a reliable estimate of the market risk premium.
• D) would be unaffected if the dividend discount model were applied instead.
• E) will be unaffected by changes in overall market risks.

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Definitions:

Multicollinearity

A statistical phenomenon in which two or more predictor variables in a multiple regression model are highly correlated, potentially distorting the model's coefficients.

Biased Estimates

Estimates that are systematically different from the population parameters being estimated, due to errors in data collection, analysis, or selection.

Slope Coefficients

In linear regression, the slope coefficient measures the rate of change in the dependent variable for a one-unit change in the independent variable.

Dependent Variable

A variable in statistical modeling, experiments, or observations that is expected to change as a result of manipulations in the independent variable(s).