The Cost of Capital of Firm a Is 11

question 36

Multiple Choice

The cost of capital of Firm A is 11.2 percent compared to 14.1 percent for Firm B.The market rate of return is 10.8 percent and the risk-free rate is 4 percent.Firm A is considering the acquisition of Firm B.Should this acquisition occur,it will be financed with debt at an interest cost of 8.7 percent.Which of these rates is most appropriate to use as the discount rate when analyzing the acquisition of Firm B by Firm A?

• A)8.7%
• B)11.2%
• C)10.8%
• D)14.1%
• E)4)0%

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Definitions:

Equity Theory

A theory of motivation that explains how employees perceive fairness in workplace reward distribution, comparing their input-outcome ratios to those of others.

Perceived Inequity

Perceived inequity occurs when an individual believes that the ratio of their inputs to outcomes is not equal to the input-outcome ratios of others, leading to feelings of dissatisfaction and unfair treatment.

Unfairly

In a manner that is unjust, partial, or prejudiced, not giving equal treatment or opportunity.

McClelland's Motivation Theory

A psychological theory that identifies three primary drivers of motivation: need for achievement, need for affiliation, and need for power.