If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms. Therefore, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt.
Answer the following statement true (T) or false (F)
False
Rationale: Increased inflation results in a parallel upward shift in the SML, which means equal percentage increases in the required returns on debt and equity.
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