A Firm Uses Only Debt and Equity in Its Capital

question 63

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 70 percent. The firm's cost of equity is 13 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) 7.19 percent
• B) 8.02 percent
• C) 6.38 percent
• D) 1.9 percent

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Definitions:

Discretionary Fiscal Policy

The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth

Taxation

The practice by which a government imposes financial charges on its citizens or residents to fund public spending and various public expenditures.

Government Spending

The total of all government expenses, including salaries, defense, education, and public services.

Net Taxes

refer to the total amount of taxes paid to governments by individuals and businesses after accounting for transfers and subsidies received from the government.