Firm J's Earnings and Stock Price Tend to Move Up

question 2

Multiple Choice

Firm J's earnings and stock price tend to move up and down with other firms in the S&P 500,while Firm F's earnings and stock price move counter cyclically with J and other S&P companies.Both J and F estimate their costs of equity using the CAPM,they have identical market values,their standard deviations of returns are identical,and they both finance only with common equity.Which of the following statements is CORRECT?

• A) J and F should have identical WACCs because their risks as measured by the standard deviation of returns are identical.
• B) If J and F merge,then the merged firm MW should have a WACC that is a simple average of J's and F's WACCs.
• C) Without additional information,it is impossible to predict what the merged firm's WACC would be if J and F merged.
• D) Since J and F move counter cyclically to one another,if they merged,the merged firm's WACC would be less than the simple average of the two firms' WACCs.
• E) J should have the lower WACC because it is like most other companies,and investors like that fact.

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Definitions:

Expenses

Expenses are the costs incurred during the operation of a business or the execution of a project, including but not limited to materials, labor, and overhead costs.

Standard Operating Procedures

Detailed, written instructions designed to achieve uniformity in the performance of a specific function or operation within an organization.

Employee Handbooks

Employee handbooks are comprehensive manuals provided by employers to their employees, detailing the organization's history, mission, values, policies, procedures, and benefits.

Stated

Explicitly expressed or declared.