The Cost of Equity for a Firm

question 13

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.

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Definitions:

Bond

A fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period at a variable or fixed interest rate.

Capital Gains Yield

The change in the price of a security or investment over a specified period, excluding dividends, expressed as a percentage of the investment's initial price.

Total Return

The overall return on an investment over a specific time period, including both capital gains and dividends or interest, expressed as a percentage of the investment's initial cost.

Real Rate

The interest rate adjusted for inflation, reflecting the true return on an investment over time.