All else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.

a. a reduction in the dividend amount

b. an increase in the dividend amount

c. a reduction in the market rate of return

d. a reduction in the risk free rate

d. a reduction in the firms beta

Question

Keshawn Porter

Business

3 June, 19:00

All else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.

a. a reduction in the dividend amount

b. an increase in the dividend amount

c. a reduction in the market rate of return

d. a reduction in the risk free rate

d. a reduction in the firms beta

+2

Answers (1)

Know the Answer?

Milton Richards · Answer 1

d. a reduction in the risk free rate

Explanation:

The risk-free return rate is the estimated return rate of a zero-risk investment.

The real risk-free price can be determined by subtracting from the Treasury bond yield matching your portfolio period the current inflation rate.

The risk-free rate reflects the return that an investor could receive throughout a set period of time from a completely risk-free investment.