An increase in ________ will increase the cost of common equity.

Question

Quizplus · Accepted Answer

The cost of common equity is calculated using the capital asset pricing model (CAPM), which takes into account the risk-free rate and the expected return on the market. Therefore, an increase in either the risk-free rate or the expected growth rate of dividends (which affects the expected return on the market) will increase the cost of common equity. A drop in the stock price may not necessarily affect the cost of common equity directly, as it is only one factor affecting the overall return on equity for investors. Therefore, the best choice is D.

An Increase in ________ Will Increase the Cost of Common