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

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Definitions:

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A simplified tax form previously used by the IRS for individuals with uncomplicated tax situations, now superseded by Form 1040.

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