Quiz Ch 10 – T/F Inflation Impact on Equity and Debt Costs

Fundamentals of Financial Management, Concise

Brigham and Houston

09th Edition

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True or false: Assuming a constant SML slope, an escalation in long-term inflation expectations would exert a more substantial influence on the required rate of return on equity (rs) compared to the interest rate on long-term debt (rd) for the majority of firms. As a result, the rise in the cost of equity by a percentage point would exceed the increase in the long-term debt interest rate.

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