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icandoit2010
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Joined: 21 Aug 2010
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Posts: 62

Posted: 18 Jan 2011 at 20:05 \| IP Logged

There's a glitch in either the question or answers.

Rf + B(Rm-Rf)

original 10 + 1(20 - 10) = 20

a. 5 + 1(20 - 5) = 20

b. 10 + 2(20-10) = 30

d. 15 + 1(20 - 15) = 20

Should be a decrease in beta 10 + .5(20-10) = 15

We have to assume that beta is the same for choices a and d. So both a and d would be incorrect. I think the correct answer should be a decrease in beta which is not given.

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Aznanalyst83
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Posted: 29 Jan 2011 at 10:51 \| IP Logged

I immediately thought A,because the most basic principal is the idea what a investor can get in a risk free market-I.E (U.S Gov Bonds etc) deceased, so will a company's cost of equity. So when all else is equal, if FMT interest free rate goes down, so do a company's cost of equity.

D, on other hand,while it is true, it is not always true. I have seen live problems where a solution can be the right answer...just not in all conditions.

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DumbButTrying
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Joined: 19 Sep 2010
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Posted: 30 Jan 2011 at 00:36 \| IP Logged

Aznanalyst83 is correct. An answer choice that it is sometimes true is used as a distractor. From the Gospel of Tim Gearty.

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