Answer:
The cost of equity for ABC is 11.74 percent and for XYZ it is 14.47 percent.
Explanation:
a. For ABC
ABC cost of equity = Earning before interest and tax (EBIT) / Equity = $62,222 / $530,000 = 0.1174, or 11.74%
b. For XYZ
Perpetual debt = $530,000 - $310,000 = $220,000
Interest on debt = $220,000 * 7.9% = $17,380
Earning after interest = $62,222 - $17,380 = $44,842
XYZ cost of equity = $44,842 / $310,000 = 0.1447, or 14.47%
The average cost tells a firm whether it can earn profits given the price market. The average cost will allow a firm to see what their cost of inventory is and compare it to similar goods within their inventory and on the market. This will also enable them to set a product price to be sold to a customer and make a profit.
The idea that investors on average have earned a higher return from common stocks than from Treasury bills supports the view that: there is a relationship between risk and return.
<h3>Which investment kind normally yields the highest return?</h3>
Stocks have historically yielded investments with the highest average rate of return. However, stock is one of the riskiest investments because there are no assurances of earnings when you purchase shares.
<h3>What is the relationship between an investment's risk and projected return?</h3>
The return needed to entice investors to buy an asset is higher the riskier the investment is, and vice versa. It is clear from the link between risk and return that investors are risk averse; they need HIGHER rates of return to be persuaded to invest in riskier securities.
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Answer: Option (A) is correct.
Explanation:
If there is a higher inflation rate in an economy and it is still rising because aggregate demand is rising at a faster rate than an aggregate supply.
So, there is a need to use contractionary fiscal policy. If the government increase taxes then as a result aggregate demand decreases. This is because of the fall in disposable income, with less income in hand consumers demand for the goods decreases.
Hence, this contractionary fiscal policy will help government to reduce inflation to some extent.