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:

Fair Market Value

The estimated price at which an asset would trade in a competitive auction setting.

Gain on Disposal

The profit realized from the sale of assets, other than inventory, for more than their carrying amount on the books.

Financial Statements

Comprehensive reports created to communicate a company's financial performance and position during a specific period, often including a balance sheet, income statement, and cash flow statement.

Loss on Disposal

The monetary deficit experienced when selling an asset below its recorded value.