A Firm Uses Only Debt and Equity in Its Capital

question 71

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 75 percent. The firm's cost of equity is 16 percent and it has a tax rate of 21 percent. If the firm's WACC is 13%, what is the firm's before-tax cost of debt?

• A) 6.89 percent
• B) 6.28 percent
• C) 5.71 percent
• D) 5.06 percent

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Definitions:

Price Elasticity

The measure of how much the quantity demanded of a good responds to a change in the price of that good, expressed as a ratio.

Monopolistic

Referring to a market structure in which there is only one producer/seller for a product or service, or very few, leading to limited competition.

Gray Marketing

The legal, but unofficial, distribution of products through channels not authorized by the original manufacturer or trademark owner.

Prescription Drugs

Medications that legally require a medical prescription to be dispensed, typically regulated due to their potency, side effects, or potential for abuse.