If Expectations for Long-Term Inflation Rose,but the Slope of the SML

question 48

True/False

If expectations for long-term inflation rose,but the slope of the SML remained constant,this would have a greater impact on the required rate of return on equity,r_s,than on the interest rate on long-term debt,r_d,for most firms.In other words,the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.

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Definitions:

Reciprocal

The multiplicative inverse of a number or expression; for any nonzero number x, its reciprocal is 1/x.

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A mathematical object used to count, measure, and label.

Extraneous Solutions

Solutions obtained in the process of solving an equation that do not satisfy the original equation.

Equation

An expression asserting the equality of two quantities, often containing one or more variables.