Assume a firm has a market value of less than $50 million and a $\beta$ of 1.75.Also,assume the risk-free rates of return and equity premium are 5.0 and 5.5 percent,respectively.The firm's cost of equity using the CAPM method adjusted for firm size is 23.8%.

Question

Quizplus · Accepted Answer

The CAPM method adjusted for firm size takes into account the firm's size and its impact on the cost of equity. In this case, the firm's small size results in a higher cost of equity, which is reflected in the calculated value of 23.8%.

Assume a Firm Has a Market Value of Less Than β\betaβ

Assume a Firm Has a Market Value of Less Than $\beta$