A fiRm Has a Debt-To-Equity Ratio of

question 1

Multiple Choice

A firm has a debt-to-equity ratio of .60.Its cost of debt is 8%.Its overall cost of capital is 12%.What is its cost of equity if there are no taxes or other imperfections?

• A)10.0%
• B)13.5%
• C)14.4%
• D)18.0%
• E)None of the above.

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Definitions:

Long-run Supply Curve

A graphical representation showing the relationship between price and quantity supplied over a longer period, when all inputs can be varied.

Perfectly Elastic

Describes a situation in which the quantity demanded or supplied changes by an infinite amount in response to any price change, depicted as a horizontal line on a graph.

Long-run Equilibrium

A state in which all factors of production are variable, leading to a situation where firms only earn normal profits and no incentives exist for entering or exiting the industry.

Short-run Equilibrium

The condition in which the quantity supplied equals the quantity demanded at a particular price level, but only over a short period.