An All-Equity Firm Has a Return on Assets of 17

question 5

Multiple Choice

An all-equity firm has a return on assets of 17.5 percent.The firm is considering converting to a debt-equity ratio of .40.The pretax cost of debt is 7.5 percent.Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital structure?

• A)21.95 percent
• B)21.22 percent
• C)22.54 percent
• D)22.97 percent
• E)21.50 percent

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Definitions:

Benchmark

A Benchmark is a standard or point of reference against which things may be compared or assessed.

Inventory Turnover Ratio

A metric showing how many times a company has sold and replaced its inventory over a specific period, indicating efficiency in sales and inventory management.

Inventory Accounting Method

Techniques used to calculate the cost of goods sold and value of inventory, including FIFO, LIFO, and weighted average cost methods.

Current Ratio

A financial metric assessing a firm's capability to settle debts due within a year.