Risk-free rate increases

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Questions

1. If the risk-free rate increases by 2% and the default risk premium of the company decreases by 2% what is likely to happen to the companies cost of capital, keeping everything else constant?

Assume market value of equity is equal to market value of debt.

Hopur svarmoguleika

Cost of capital will increase by 1%

Cost of capital will decrease by 1%

Cost of capital will be unchanged

Insufficient information

2. Which of the following statements about market price is correct?

Hopur svarmöguleika

Comparing market price and intrinsic value can help you determine whether an asset is over- or undervalued by the market.

All market participants agree on the price and that is the price you can see on the stock exchange.

Market price is always equal to intrinsic value of the company.

Market price is the result of our valuations.

Non of the above.

Reference no: EM133308209

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