A Firm Has a Capital Structure with $50 Million in Equity

question 96

Multiple Choice

A firm has a capital structure with $50 million in equity and $100 million of debt. The cost of equity capital is 12% and the pretax cost of debt is 7%. If the marginal tax rate of the firm is 30%, compute the weighted average cost of capital of the firm.

• A) 7.3%
• B) 6.8%
• C) 6.3%
• D) 5.6%

---

Definitions:

Linear Regression

A statistical method for modeling the relationship between a dependent variable and one or more independent variables by fitting a linear equation to observed data.

Correlation Matrix

A table showing correlation coefficients between variables, indicating the strength and direction of relationships.

Regression Model

A statistical model that estimates the relationship between a dependent variable and one or more independent variables.

Regression Coefficients

Numeric values that represent the degree of change in the dependent variable expected for a one-unit change in one of the independent variables, holding other factors constant.