Author Question: If a company's stock is perceived to be more risky than average, what will happen to their equity ... (Read 39 times)

nautica902 · **on:** Jul 1, 2018

If a company's stock is perceived to be more risky than average, what will happen to their equity cost of capital? Explain using the capital asset pricing model.

What will be an ideal response?

Question 2

When deciding where to produce, a key decision criterion for a multinational enterprise

A) is the nationality of its founders.
B) hinges on the ownership of its various subsidiaries.
C) is the tax laws of the various countries is it considering.
D) is the location of its headquarters.

stillxalice · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

A stock that is more volatile (riskier) than the market average will have a beta of greater than 1. This means that the return that stockholders will require will be greater than average kj = Rf +(km - Rf). In other words, the company will have to pay stockholders more since they must take a greater risk, and the equity cost of capital will rise.

Answer to Question 2

C