Al's Pub Has Debt with Both a Book and a Market

question 179

Multiple Choice

Al's Pub has debt with both a book and a market value of $120,000. This debt has a coupon rate of 9% and pays interest annually. The expected earnings before interest and taxes are $42,600, the tax rate is 34%, and the unlevered cost of capital is 11%. What is the firm's cost of equity?

• A) 11.90%
• B) 12.07%
• C) 12.11%
• D) 12.15%
• E) 12.18%

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Definitions:

Article 2

A portion of the Uniform Commercial Code that deals specifically with the sale of goods.

Statute

A written law passed by a legislative body at both the federal and state levels, intended to prescribe or prohibit certain actions.

UCC

Uniform Commercial Code; a comprehensive set of laws governing commercial transactions in the United States.

Valid Contract

A legally binding agreement between parties, fulfilling all necessary legal conditions and requirements.