Technico Plans to Start a New Product Division That Will

question 24

Multiple Choice

Technico plans to start a new product division that will have a capital structure of 70 percent debt and 30 percent equity. The leveraged beta for this division has been estimated to be 2.02. What will be Technico's weighted cost of capital for this new division if the after-tax cost of debt is 7 percent, the risk-free rate is 8 percent, and the market risk premium is 5 percent?

• A) 14.77%
• B) 10.33%
• C) 18.1%
• D) 1.03%

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Definitions:

Cash

A form of liquid asset that represents immediate purchasing power and can be used for transactions.

Closing Entries

Journal entries made at the end of an accounting period to transfer temporary accounts' balances to permanent accounts, thereby resetting the temporary accounts for the next period.

Revenue Accounts

Accounts that track the income a company generates from its normal business activities, such as sales of goods or services.

Retained Earnings

The portion of a company's profits that is kept or retained rather than paid out as dividends to shareholders, often used for reinvestment in the business.