The cost of equity for a company with a debt-equity ratio of .41:
A) tends to remain static even as the company's level of risk increases.
B) increases as the unsystematic risk of the company's stock increases.
C) is affected by either a change in the company's beta or its projected rate of growth.
D) equals the risk-free rate plus the market risk premium.
E) equals the company's pretax weighted average cost of capital.

Question

Quizplus · Accepted Answer

The cost of equity for a company with a debt-equity ratio of .41 is affected by either a change in the company's beta or its projected rate of growth. This is because the debt-equity ratio affects the risk profile of the company, which in turn affects its cost of equity. As the level of debt increases, so does the risk of bankruptcy, which increases the company's cost of equity. Similarly, as the company's projected rate of growth increases, its cost of equity may also increase due to the increased risk associated with growth opportunities. Therefore, both changes in beta and projected rate of growth can affect the cost of equity for a company with a debt-equity ratio of .41.

The Cost of Equity for a Company with a Debt-Equity