The Cost of Equity for a Firm

question 21

Multiple Choice

The cost of equity for a firm:

• A) tends to remain static for firms with increasing levels of risk.
• B) increases as the unsystematic risk of the firm increases.
• C) ignores the firm's risks when that cost is based on the dividend growth model.
• D) equals the risk-free rate plus the market risk premium.
• E) equals the firm's pretax weighted average cost of capital.
• F) None of the above.

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Definitions:

Variable Costs

Costs that shift in direct correlation with production or sales figures, notably direct labor and raw materials.

Allocated General Overhead

involves distributing indirect costs across different departments or products to reflect their share of resources used.

Financial Advantage

The benefit gained in financial terms, which may come from different sources such as cost savings, increased revenue, or investment returns.

Fixed Manufacturing Expenses

Fixed manufacturing expenses are overhead costs that do not change with the level of production output, such as rent for a factory building.