Firm L Has Debt with a Market Value of $200,000

question 20

Multiple Choice

Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity?

• A) 11.4%
• B) 12.0%
• C) 12.6%
• D) 13.3%
• E) 14.0%

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Definitions:

Unemployment Rate

The fraction of job-seeking individuals within the labor force who are currently unemployed.

Labor Force

The total number of people, including both the employed and unemployed, who are actively seeking work.

Discouraged Workers

Individuals who are not actively looking for work because they believe no jobs are available for them or there are none for which they would qualify.

Unemployment Insurance

A state-funded initiative offering monetary support to people unemployed due to circumstances beyond their control.