When We Compute the Cost of Equity Capital for a Project

question 5

Multiple Choice

When we compute the cost of equity capital for a project we assume that the ________ of the project is equivalent to the average risk of the firm's investments.

• A)diversifiable risk
• B)market risk
• C)non-systematic risk
• D)volatility

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Definitions:

Arbitrage Opportunity

This refers to the chance to buy an asset at a low price in one market and simultaneously sell it at a higher price in another, realizing a profit without risk.

Expected Return

The weighted average of all possible returns from an investment, factoring in the probabilities of each outcome.

Firm-characteristic Variables

Factors specific to a company that can influence its stock price, such as size, earnings, and debt levels.

Risk Premiums

The additional return that an investor expects to receive for taking on additional risk.