Question

Which one of these statements is correct?

a. Flotation costs increase the value of RS.

b. The weighted average cost of capital is equal to B /S(RS)(1 – tc).

c. The discount rate for levered equity is unaffected by the debt-equity ratio.

d. The cost of equity for an all-equity firm is less than the cost of equity for a levered firm.

e. The cost of levered equity is indirectly related to beta.

Answer 1

d. The cost of equity for an all-equity firm is less than the cost of equity for a levered firm.

Step-by-step explanation:

The correct statement is that, the cost of equity for an all-equity firm is less than the cost of equity for a levered firm.

Mathematically, Cost of equity =([DPS/CMV] + GRD)

where;

DPS = Dividends per share

CMV = Current market value

GRD = Growth rate of divide

From the investor's perspective, cost of equity can be defined as the rate of return expected from an investment in equity.

From the company’s perspective, cost of equity gives the expected rate of return on an investment.