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

question 82

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:

Absorbed

The process by which substances are taken into cells or across tissues, such as liquids absorbed by the skin or nutrients by the body.

Manufacturer

A person or company that makes goods for sale, especially on a large scale and involving complex machinery and processes.

Analgesic

A class of drugs designed to relieve pain without causing loss of consciousness, often referred to as painkillers.

Antacids

Medications that neutralize stomach acid to relieve symptoms of heartburn and indigestion.