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

question 84

Multiple Choice

Firm M's earnings and stock price tend to move up and down with other firms in the S&P 500,while Firm W's earnings and stock price move counter cyclically with M and other S&P companies.Both M and W 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) M should have the lower WACC because it is like most other companies,and investors like that fact.
• B) M and W should have identical WACCs because their risks as measured by the standard deviation of returns are identical.
• C) If M and W merge,then the merged firm MW should have a WACC that is a simple average of M's and W's WACCs.
• D) Without additional information,it is impossible to predict what the merged firm's WACC would be if M and W merged.
• E) Since M and W 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.

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Definitions:

Thyroid Gland

An endocrine gland located in the neck, producing hormones that regulate metabolism, energy, and overall growth and development.

Pineal Gland

A small endocrine gland in the vertebrate brain that produces and secretes the hormone melatonin, regulating sleep patterns.

Adrenal Gland

A pair of endocrine glands that sit above the kidneys and produce hormones such as adrenaline and cortisol, which help control stress and other bodily functions.

Peripheral Nervous System

The part of the nervous system that consists of the nerves and ganglia outside of the brain and spinal cord.