In an Efficient Market, the Cost of Equity for a Highly

question 96

Multiple Choice

In an efficient market, the cost of equity for a highly risky firm:

• A)will be less than the market rate but higher than the risk-free rate.
• B)must equal the market rate of return.
• C)changes by 1 percent for every 1 percent change in the risk-free rate.
• D)decreases as the beta of the firm's stock increases.
• E)increases in direct relation to the stock's systematic risk.

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Definitions:

Menu Costs

The costs to a company associated with changing prices, including the physical costs of changing price tags and the administrative costs of updating systems.

Inflation Rates

The percentage rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling, usually measured over a specific period of time.

Inflation Rate

The percentage increase in the general price level of goods and services in an economy over a period of time, indicating the rate at which purchasing power is falling.

Money Demand

The desired holding of financial assets in the form of money; that is, cash or bank deposits.