Question
You evaluate 3 companies under the impact of an economic crisis on financing costs. The corporate tax rate for all companies is 21 percent. Assume
You evaluate 3 companies under the impact of an economic crisis on financing costs.
The corporate tax rate for all companies is 21 percent. Assume that the market risk premium has increased, and the riskless rate has not changed due to the crisis. Choose the correct option regarding the cost of capital for these companies during the crisis?
- HULA has an unlevered beta of 0.26, a debt-to-equity ratio of 3.77.
- Tesla has an unlevered beta of 0.15, a debt-to-equity ratio of 4.87.
- Apple has an unlevered beta of 0.43, a debt-to-equity ratio of 2.17.
I. HULA's cost of equity has increased more compared to Tesla.
II. Apples equity investors require a higher return compared to HULA and Tesla.
III. To experience the same increase in cost of equity as Apple, Tesla should decrease its debt-to-equity ratio.
A. | I and III | |
B. | I and II | |
C. | Only II | |
D. | I, II, and III | |
E. | II and III |
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