A Firm Has a Return on Equity of 12

question 37

Multiple Choice

A firm has a return on equity of 12.4 per cent according to the dividend growth model and a return of 18.7 per cent according to the capital asset pricing model.The market rate of return is 13.5 per cent.What rate should the firm use as the cost of equity when computing the firm's WACC?

• A)13.5 per cent
• B)18.7 per cent because it is higher than 12.4 per cent
• C)The arithmetic average of 12.4 per cent,13.5 per cent,and 18.7 per cent
• D)12.4 per cent because it is lower than 18.7 per cent
• E)The arithmetic average of 12.4 per cent and 18.7 per cent