A Very Large Firm Has a Debt Beta of Zero

question 45

Multiple Choice

A very large firm has a debt beta of zero. If the cost of equity is 11%, and the risk-free rate is 5%, the cost of debt is:

• A) 5%.
• B) 6%.
• C) 11%.
• D) 15%.

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Definitions:

Required Reserve Ratio

The fraction of deposits that banks are required to hold in reserve and not lend out, typically determined by a central bank.

Total Money Supply

The entire stock of currency and other liquid instruments circulating in a country's economy as of a particular time.

Money Supply

The overall accumulation of monetary assets in an economy at a certain point, including cash, coins, and funds in checking and savings accounts.

Reserves

Assets held by a financial institution or an individual as a buffer for potential future liabilities or emergencies.