Coco Company Is Financed Entirely by Common Stock Which Is

question 51

Multiple Choice

Coco Company is financed entirely by common stock which is priced to offer a 10% rate of return.Coco has an income tax rate of 40%.If the company repurchases 40% of the stock and substitutes an equal value of debt costing 7%, what is the cost on the common stock after repurchasing?

• A)10%
• B)11.2%
• C)12%
• D)None of the above

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Definitions:

Beta

A measure of a stock's volatility in relation to the overall market, indicating the stock's risk profile.

Systematic Risk

A type of risk that is unavoidable and impacts the whole market or a particular sector, often called market risk or non-diversifiable risk.

Unsystematic Risk

The risk inherent to a specific company or industry, which can be mitigated through diversification of an investment portfolio.