Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Chapter 11, Question 4
Transcribed Image Text:What do you notice about the change in the cost of equity as beta increases? (Select the best response.)
O A. A beta of 0.63 results in a decrease in the cost of equity of 0.26% (10.02% - 9.76%). Abeta of 1.33 results in a decrease in the cost of equity of 1.66%
(17.37% - 15.71%). The cost of equity decreases at an increasing rate as beta increases.
O B. Abeta of 0.63 results in an increase in the cost of equity of 0.26% (10.02% - 9.76%). A beta of 1.33 results in an increase in the cost of equity of 1.66%
(17.37% - 15.71%). The cost of equity increases as beta increases.
Transcribed Image Text:Cost of equity: SML. Stan is expanding his business and will sell common stock for the needed funds. If the current risk-free rate is 4.4% and the expected market
return is 12.9%, the cost of equity for Stan is
a. 9.76% if the beta of the stock is 0.63.
b. 11.97% if the beta of the stock is 0.89.
c. 12.56% if the beta of the stock is 0.96.
d. 15.71% if the beta of the stock is 1.33.
Suppose Stan had to delay the sale of the common stock for six months. When he finally did sell the stock, the risk-free rate had fallen to 3.4%, but the expected
return on the market had risen to 13.9%. What was the effect on the cost of equity by waiting six months, using the four different betas? What do you notice about the
increases in the cost of equity as beta increases?
a. What is the new cost of equity if the beta of the stock is 0.63?
% (Round to two decimal places.)
b. What is the new cost of equity if the beta of the stock is 0.89?
% (Round to two decimal places.)
c. What is the new cost of equity if the beta of the stock is 0.96?
% (Round to two decimal places.)
d. What is the new cost of equity if the beta of the stock is 1.33?
% (Round to two decimal places.)
What do you notice about the change in the cost of equity as beta increases? (Select the best response.)
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