Earnings and stock price tend to move up and down

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Reference no: EM131350997

Firm M's earnings and stock price tend to move up and down with other firms in the S&P 500, while Firm W's earnings and stock price move counter cyclically with M and other S&P companies. Both M and W estimate their costs of equity using the CAPM, they have identical market values, their standard deviations of returns are identical, and they both finance only with common equity. Based on the above information, here is a statement “If M and W merge, then the merged firm MW should have a WACC that is a simple average of M's and W's WACCs.” Is this statement true or false? EXPAIN.

Reference no: EM131350997

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