Question

1. Which one of the following factors is not considered in calculating the firm’s cost of equity?

1. risk free rate of return
2. beta
3. interest rate on corporate debt
4. expected return on equities
5. difference between expected return on stocks and the risk free rate of return

2. Which one of the following factors is not considered in calculating the firm’s cost of capital?

1. cost of equity
2. interest rate on debt
3. the firm’s marginal tax rate
4. book value of debt and equity
5. the firm’s target debt to equity ratio

3. A firm’s leveraged beta reflects all of the following except for

1. unleveraged beta
2. the firm’s debt
3. marginal tax rate
4. the firm’s cost of equity
5. the firm’s equity

Answer 1

1)	Under the Capital Asset pricing model
	Rs = Rf + Beta*(Rm-Rf)
	Rs is the expected return on the security
	Rf is the risk free rate,
	Rm - Rf is the difference between the expected return on the market and the
	risk free rate.
	c) interest rate on corporate debt
2)	Weighted average cost of capital (WACC) = [(S/S+B)*Rs + (B/S+B)*Rb(1-tc)]
		S = equity, B = debt, Rs = Cost of equity, Rb = cost of debt,
		tc = corporations tax rate
	The following factor is not considered in calculating the firm's cost of capital
	d) book value of debt and equity
3)	leveraged beta = unlevered beta * (1+ (1-t) (Debt/Equity))
	where t is the marginal tax rate.
	A firm’s leveraged beta reflects all of the following except for
	d) the firm’s cost of equity