Assuming the CAPM or One-Factor Model Holds, What Is the Cost

question 46

Multiple Choice

Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%?

• A) 10.8%.
• B) 12.8%.
• C) 10.4%.
• D) 14.4%.

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Definitions:

Short-Term Capital Loss

A loss realized on the sale or exchange of a capital asset held for one year or less.

Completely Worthless

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The maximum amount of depreciation expenses that taxpayers can claim for luxury vehicles, as defined and imposed by the IRS.

Depreciation

The accounting method of allocating the cost of a tangible or physical asset over its useful life, reflecting the loss in value over time.