When a Firm with a High Market-Beta Merges with a Firm

question 55

Multiple Choice

When a firm with a high market-beta merges with a firm with a lower market-beta,

• A)the cost of capital of the combined firm will be a weighted average of the costs of capital for the individual firms.
• B)investors will require a lower rate of return on the combined firm than they would have for each individual firm due to greater diversification.
• C)the cost of capital of the combined firm will be lower due to greater diversification.
• D)Both A and B are correct statements.

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