If Fed actions caused the risk-free rate to increase, we would expect the cost of capital to: A) increase. B) decrease. C) remain unchanged. D) need more information to answer question.
A, as the required return for common equity should increase.
A not only because the cost of common equity(RE and new equity) will increase as a result of let’s say valuation RFR+risk premium The price of preffered and debt should go down which will increase the cost of debt
Thanks florinpop, your explanation helps.