A Firm Uses Only Debt and Equity in Its Capital

question 96

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of debt is 75 percent. The firm could issue new bonds at a yield to maturity of 12 percent and the firm has a tax rate of 21 percent. If the firm's WACC is 13 percent, what is the firm's cost of equity?

• A) 38.29 percent
• B) 36.00 percent
• C) 23.56 percent
• D) 4.00 percent

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Definitions:

Tax Cut

A reduction in the rate of taxes imposed by the government.

Government Contract

A legal agreement between a government entity and a private company for goods or services, often involving specific regulatory requirements.

Company Fraud

Illegal activities conducted by a company or its representatives, intended to deceive investors, authorities, or the public for financial gain.

CAPM

The Capital Asset Pricing Model, a theoretical framework used to determine the expected return on an investment based on its risk in comparison to the market.