An All-Equity Firm Has a Return on Assets of 21

question 67

Multiple Choice

An all-equity firm has a return on assets of 21 percent.The firm is considering converting to a debt-equity ratio of .48.The pretax cost of debt is 6.9 percent.Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital structure?

• A)28.22 percent
• B)27.49 percent
• C)28.81 percent
• D)29.24 percent
• E)27.77 percent

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Definitions:

Profit-Maximizing Level

The point at which a business achieves the highest profit, with costs minimized and revenue maximized.

Total Revenue

The total amount of money received by a company for goods sold or services provided during a certain time period.

Total Cost

The overall amount of money spent on production, which includes both fixed and variable expenses.

Market Price

The prevailing market rate at which a service or asset is offered for purchase or sale.