A Firm Uses Only Debt and Equity in Its Capital

question 89

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of debt is 45 percent. The firm could issue new bonds at a yield to maturity of 10 percent and the firm has a tax rate of 21 percent. If the firm's WACC is 12 percent, what is the firm's cost of equity?

• A) 15.35 percent
• B) 15.63 percent
• C) 16.09 percent
• D) 14.57 percent

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Definitions:

Double Coincidence

A situation in a barter system where two parties each hold an item the other wants, facilitating an exchange without the need for money.

Barter

The exchange of one good or service for another good or service; a trade.

M2

A measure of the money supply that includes all elements of M1 (cash and checking deposits) plus savings deposits, money market mutual funds, and other time deposits.

M1

A segment of the money supply encompassing all tangible currency, such as bills and coins, in addition to demand deposits, checking accounts, and negotiable order of withdrawal (NOW) accounts.