Use the following information to answer the question(s)below.
Luther Industries has 25 million shares outstanding trading at $18 per share.In addition,Luther has $150 million in outstanding debt.Suppose Luther's equity cost of capital is 13%,its debt cost of capital is 7%,and the corporate tax rate is 40%.
-Which of the following statements is FALSE?
A)The CAPM states that we should use the risk-free interest rate corresponding to the investment horizon of the firm's investors.
B)To determine the risk premium for a stock using the security market line,we need an estimate of the market risk premium.
C)When surveyed,the vast majority of large firms and financial analysts reported using the yields of Treasury Bills to determine the risk-free rate.
D)The risk-free interest rate is generally determined using the yields of U.S.Treasury securities,which are free from default risk.

Question

Quizplus · Accepted Answer

Explanation: The statement that the vast majority of large firms and financial analysts reported using the yields of Treasury Bills to determine the risk-free rate is false. In practice, the risk-free rate is often determined using the yields of U.S. Treasury securities with a maturity that matches the investment horizon, not just Treasury Bills. Treasury Bills are short-term securities, and for longer-term investments, longer-dated Treasury securities like Treasury notes or bonds may be used to better match the investment horizon.

Use the Following Information to Answer the Question(s)below