A Firm Has a Capital Structure with $30 Million in Equity

question 57

Multiple Choice

A firm has a capital structure with $30 million in equity and $90 million of debt. The cost of equity capital is 10% and the pretax cost of debt is 6%. If the marginal tax rate of the firm is 30%, compute the weighted average cost of capital of the firm.

• A) 5.2%
• B) 4.6%
• C) 4.9%
• D) 5.7%

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Definitions:

Prepaid Expenses

Costs paid in advance for services or goods to be received in the future, recognized as assets on a balance sheet until they are consumed or used.

Liabilities

Financial debts or obligations that arise during the course of business operations, owed by a company to another entity.

Accounts Receivable

Funds that customers are yet to pay to a company for products or services already provided.

Credit Sales

Sales made by a business where payment is delayed, allowing the buyer to purchase goods or services on credit.