A Firm Has a Debt-To-Equity Ratio of 1

question 10

Multiple Choice

A firm has a debt-to-equity ratio of 1. Its levered cost of equity is 16 percent, and its cost of debt is 8 percent. If there were no taxes, what would be its cost of equity if the debt-to-equity ratio were zero?

• A)8 percent
• B)10 percent
• C)12 percent
• D)14 percent

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Definitions:

Variable Cost

Expenses that vary directly with the level of production or volume of operations in a business.

Period Cost

These are costs that are not directly tied to the production process and are expensed in the period in which they occur. Examples include selling, general, and administrative expenses.

Raw Materials

Basic materials used in the production process, transformed into finished goods through manufacturing or processing.

Computer Board

A printed circuit board used in a computer to which the processor, RAM, and other components are attached.