Assuming the CAPM or One-Factor Model Holds, What Is the Cost

question 46

Multiple Choice

Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is 9%, and the return to the company's debt is 7%?

• A) 10.8%.
• B) 12.8%.
• C) 10.4%.
• D) 14.4%.

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Definitions:

Net Book Value

The total value of a company's assets minus its liabilities and intangible assets, indicating the net worth of the company's tangible assets.

Consolidated Net Income

The combined net income of a parent company and its subsidiaries, factoring in the effects of intercompany transactions.

Equity Method

An accounting technique used for recording investments in associate companies where the investment is initially recorded at cost and subsequently adjusted for the investor’s share of the net profits or losses of the investee.

Consolidation Worksheet Entries

Journal entries used in preparing consolidated financial statements, helping to adjust and eliminate internal transactions between parent and subsidiary entities.