A Firm Uses Only Debt and Equity in Its Capital

question 121

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of debt is 40 percent. The firm could issue new bonds at a yield to maturity of 9 percent and the firm has a tax rate of 21 percent. If the firm's WACC is 11 percent, what is the firm's cost of equity?

• A) 15.92 percent
• B) 13.59 percent
• C) 15.03 percent
• D) 15.68 percent

Identify the impact of market conditions and firm-specific risk factors on cost of equity and WACC.

Calculate the after-tax cost of debt.

Estimate the expected rate of return on a company's stock.

Determine the weight of preferred stock and debt in the firm's capital structure for WACC computation.

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Definitions:

Financial Control

The management of an organization's revenues, expenses, and assets to improve financial efficiency and effectiveness.

Small Business Failure Rates

The percentage of small businesses that do not succeed or cease operations within a certain period of time.

First Five Years

A period often referencing the early stage of an entity's existence, crucial for development and long-term success.

Operation

A series of actions or steps taken to achieve a particular end.