Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which one of the following will increase the cost of equity for a company?

A decrease in expected market returns

A reduction in the company's financial leverage

A decrease in the risk-free rate

An increase in the company's beta coefficient

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Verified step by step guidance

Understand the concept of cost of equity: The cost of equity represents the return that investors require for investing in a company's equity. It is influenced by factors such as risk-free rate, market returns, financial leverage, and the company's beta coefficient.

Review the Capital Asset Pricing Model (CAPM) formula, which is commonly used to calculate the cost of equity: \( \text{Cost of Equity} = \text{Risk-Free Rate} + \beta \times (\text{Market Return} - \text{Risk-Free Rate}) \). This formula shows how beta impacts the cost of equity.

Analyze the role of beta coefficient: Beta measures the sensitivity of a company's stock returns to market returns. A higher beta indicates higher risk, which leads to a higher cost of equity as investors demand more return for taking on additional risk.

Evaluate the impact of an increase in beta: When the company's beta coefficient increases, the \( \beta \times (\text{Market Return} - \text{Risk-Free Rate}) \) term in the CAPM formula becomes larger, directly increasing the cost of equity.

Conclude that among the options provided, an increase in the company's beta coefficient is the factor that will increase the cost of equity, as it raises the perceived risk and required return for investors.