Question 1

Cost of debt is:

a. the return that shareholders require on their investment

b. the return that preferred stockholders require on their investment

c. the return that lenders require on their investment

d. the return that equity investors require on their investment

All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm has paid dividends and has a beta of 1.5.

a. A reduction in the dividend amount.

b. A reduction in the risk-free rate.

c. A reduction in the market rate of return.

d. An increase in the dividend amount.

e. An increase in the risk-free rate.