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 currently pays an annual dividend of $1 a share and has a beta of 1.2.
A)a reduction in the dividend amount
B)an increase in the dividend amount
C)a reduction in the market rate of return
D)a reduction in the firm's beta
E)a reduction in the risk-free rate

Question

Quizplus · Accepted Answer

The cost of equity using the security market line (SML) approach is influenced by the risk-free rate, the market rate of return, and the beta of the firm. A reduction in the risk-free rate would increase the equity risk premium (the difference between the market rate of return and the risk-free rate), thus increasing the cost of equity. Changes in dividend amounts do not directly affect the cost of equity in the SML approach, and a reduction in the firm's beta would actually decrease the cost of equity by making the firm less risky relative to the market.

All Else Constant,which One of the Following Will Increase a Firm's