Scholastic Toys Is Considering Developing and Distributing a New Board

question 58

Multiple Choice

Scholastic Toys is considering developing and distributing a new board game for children.The project is similar in risk to the firm's current operations.The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm's rapid growth.How should the firm determine its cost of equity?

• A)by adding the market risk premium to the aftertax cost of debt
• B)by multiplying the market risk premium by (1 - 0.40)
• C)by using the dividend growth model
• D)by using the capital asset pricing model
• E)by averaging the costs based on the dividend growth model and the capital asset pricing model

---

Definitions:

Common Stock

Holding shares in a company, granting the holder voting privileges on company issues and entitlement to dividends.

Cash Received

The total amount of money, either in cash or equivalents, that an entity receives during a specified period, from various sources including sales, financing, and investments.

Stock Warrants

Financial instruments that give the holder the right to purchase a company's stock at a specified price before the warrant expires.