A Firm Has Zero Debt in Its Capital Structure

question 46

Multiple Choice

A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes its cost of equity capital with the new capital structure would be:

• A) 8%
• B) 16%
• C) 13%
• D) 10%
• E) None of the above

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Definitions:

Abstraction Categories

Classifications used to group concepts, objects, or ideas on the basis of shared properties or characteristics, often to simplify understanding and communication.

Superordinate Level

The highest, most general level of abstraction in categorization that groups together similar concepts or objects based on common attributes.

Basic Level

Represents the most general category at which objects are commonly identified, balancing the maximum differentiation from other categories with the highest within-category similarity.

Foreign Films

Movies produced outside of one’s own country, often in a different language and showcasing diverse cultures and storytelling techniques.