Use the Information for the Question(s)below

question 27

Multiple Choice

Use the information for the question(s) below.
Suppose that in the coming year,you expect Exxon-Mobil stock to have a volatility of 42% and a beta of 0.9,and Merck's stock to have a volatility of 24% and a beta of 1.1.The risk-free interest rate is 4% and the market's expected return is 12%.
-The cost of capital for a project with the same beta as Merck's stock is closest to:

• A)11.2%.
• B)12.8%.
• C)12.4%.
• D)11.6%.

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Definitions:

Balance Column

A column in ledgers or financial statements showing the difference between debits and credits.

Account Entry

An accounting record that logs a financial transaction in the books of accounts, impacting the balance sheet and/or income statement.

Debt Ratio

A financial ratio that measures the extent of a company’s leverage, computed by dividing total liabilities by total assets.

Financial Leverage

The use of borrowed funds to increase the potential return of an investment, which also increases the risk.