The Cost of Equity for a Firm

question 13

Multiple Choice

The cost of equity for a firm:

• A)tends to remain static for firms with increasing levels of risk.
• B)increases as the unsystematic risk of the firm increases.
• C)ignores the firm's risks when that cost is based on the dividend growth model.
• D)equals the risk-free rate plus the market risk premium.
• E)equals the firm's pretax weighted average cost of capital.

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Definitions:

Treynor Measure

A performance metric for determining how well the returns of an investment compensate the investor for taking a risk, adjusting for market volatility.

S&P 500 Index

A market-capitalization-weighted index of the 500 largest U.S. publicly traded companies and is considered one of the best representations of the U.S. stock market.

Sharpe Measure

A metric for calculating risk-adjusted return, measuring excess return per unit of deviation in an investment.

S&P 500 Index

A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States, often used as a gauge of the overall health of the US stock market.