Assume a Firm Is Financed with $1,000 Debt That Has

question 58

Multiple Choice

Assume a firm is financed with $1,000 debt that has a market beta of 0.05 and $3,000 of equity with a beta of 1.4. If the risk-free rate is 5% and the equity premium is 6%, what is the cost of
Capital of the firm? Round your answer to the nearest tenth of a percent.

• A)11.4%
• B)10.7%
• C)9.5%
• D)none of the above

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Definitions:

Mutual Funds

Investment programs funded by shareholders that trade in diversified holdings and are professionally managed.

Exchange-Traded Funds

Investment funds that are tradeable on stock exchanges, similar to stocks, and hold assets such as stocks, commodities, or bonds.

Contagion

A pattern in which stock markets have become increasingly interconnected around the world and markets in different countries have begun reacting similarly.

Net Present Value

A financial metric that calculates the present value of net cash flows (inflows minus outflows) over a period, used for assessing the profitability of an investment.