A Firm Uses Only Debt and Equity in Its Capital

question 16

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 35 percent. The firm's cost of equity is 14 percent and it has a tax rate of 21 percent. If the firm's WACC is 11 percent, what is the firm's before-tax cost of debt?

• A) 11.88 percent
• B) 9.38 percent
• C) 5.50 percent
• D) −3.00 percent

---

Definitions:

Good Sold

Items or services that have been purchased by consumers.

Tax on Sellers

A financial charge or levy imposed on product producers or sellers by the government, which often leads to the market price of the product increasing to cover the cost of the tax.

Equilibrium Price

The price at which the quantity of a good or service demanded equals the quantity supplied, leading to market stability.

Tax on Sellers

A tax on sellers is a levy imposed by the government on sellers of certain goods and services, which often leads to a shift in supply curve and price adjustments.