The UpTowner Has a Beta of 1

question 31

Multiple Choice

The UpTowner has a beta of 1.18,a debt-to-equity ratio of 0.36,and a cost of equity of 11.74 percent.The market rate of return is 10.4 percent,and the tax rate is 35 percent.If the pretax cost of debt is 6.9 percent,what is the company's WACC?

• A)9)82%
• B)8)90%
• C)10.41%
• D)9)96%
• E)10.12%

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Definitions:

Systematic Risk

Systematic risk refers to the inherent risk that affects the entire market or a large segment of the market, often influenced by macroeconomic factors such as inflation, political turmoil, or changes in interest rates.

Individual Security

An individual security refers to a specific financial instrument such as a stock or bond, representing ownership in a company or an obligation owed by an entity.

Market Risk Premium

The additional return expected by investors for holding a risky market portfolio instead of risk-free securities.

Unique Risk

The risk specific to an individual asset, such as a stock, which can be mitigated through diversification.