In the world with perfect capital market and no taxes, Firm A is unlevered and has an equity beta equal to 2. Firm B is identical to Firm A except that it has a debt to equity ratio equal to one. Assuming B can borrow at 5% risk-free rate and that Firm’s cost of capital is 10%, What are the equity beta and the cost of equity of firm B? A. Firm B has Beta equal to 2, and a cost of equity equal to 0.1 B. Firm B has Beta equal to 4, and a cost of equity equal to 0.15 C. Firm B has Beta equal to 3, and a cost of equity equal to 0.125 D. Firm B has Beta equal to 1, and a cost of equity equal to 0.15
In the world with perfect capital market and no taxes, Firm A is unlevered and has an equity beta equal to 2. Firm B is identical to Firm A except that it has a debt to equity ratio equal to one. Assuming B can borrow at 5% risk-free rate and that Firm’s cost of capital is 10%, What are the equity beta and the cost of equity of firm B? A. Firm B has Beta equal to 2, and a cost of equity equal to 0.1 B. Firm B has Beta equal to 4, and a cost of equity equal to 0.15 C. Firm B has Beta equal to 3, and a cost of equity equal to 0.125 D. Firm B has Beta equal to 1, and a cost of equity equal to 0.15
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter10: Decentralization: Responsibility Accounting, Performance Evaluation, And Transfer Pricing
Section: Chapter Questions
Problem 24E: A company had WACC (weighted average cost of capital) equal to 8. % If the company pays off mortgage...
Related questions
Question
In the world with perfect capital market and no taxes, Firm A is unlevered and has an equity beta equal to 2. Firm B is identical to Firm A except that it has a debt to equity ratio equal to one. Assuming B can borrow at 5% risk-free rate and that Firm’s cost of capital is 10%, What are the equity beta and the
A. Firm B has Beta equal to 2, and a cost of equity equal to 0.1
B. Firm B has Beta equal to 4, and a cost of equity equal to 0.15
C. Firm B has Beta equal to 3, and a cost of equity equal to 0.125
D. Firm B has Beta equal to 1, and a cost of equity equal to 0.15
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning