Use the Following Information to Answer the Question(s)below

question 32

Multiple Choice

Use the following information to answer the question(s) below.
Luther Industries has 25 million shares outstanding trading at $18 per share.In addition,Luther has $150 million in outstanding debt.Suppose Luther's equity cost of capital is 13%,its debt cost of capital is 7%,and the corporate tax rate is 40%.
-Which of the following statements is FALSE?

• A)The CAPM states that we should use the risk-free interest rate corresponding to the investment horizon of the firm's investors.
• B)To determine the risk premium for a stock using the security market line,we need an estimate of the market risk premium.
• C)When surveyed,the vast majority of large firms and financial analysts reported using the yields of Treasury Bills to determine the risk-free rate.
• D)The risk-free interest rate is generally determined using the yields of U.S.Treasury securities,which are free from default risk.

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Definitions:

Markup

The percentage added to costs to determine selling price, typically used in retail to cover costs and earn a profit.

Selling Price

The amount for which a product is sold, excluding any discounts or allowances.

Job T288

A reference to a specific job or project identified by the code T288, which could involve specific tasks, costs, and objectives.

Predetermined Manufacturing Overhead Rate

A rate used to allocate estimated manufacturing overhead to individual jobs based on a predetermined activity, such as labor hours or machine hours.