Choose the best answer, and why.
1. In calculating WACC, we calculate After Tax cost of debt but do not make any such distinction between after tax and before tax costs for cost of preferred stock or cost of common equity.
A. This is because debt is the least risky component of capital
B. This is because debt is the most risky component of capital, because too much debt can push the company into bankruptcy, which is not the case with preferred stock or common equity
C. This is because of regulatory reasons
D. This is only because of corporate tax reasons
2. Beta for a stock, the most common measure in analyzing risk return trade- offs in finance is called “stand-alone “risk.
A. This is true
B. This is false
C. This question cannot be answered from the given information
D. Actually, it can be both, depending on circumstances
3. I have problems in understanding the concept of “risk aversion” Which of the following is correct?
A. A more risk averse person would require less return to face the face same risk as a less risk averse person
B. No, he would require more return because his aversion is higher
C. They both would require the same return, because in the final analysis, risk aversion, does not matter.
D. Risk aversion is morally wrong, so forget about the concept, nothing to understand.