A fiRm Has Zero Debt in Its Capital Structure

question 62

Multiple Choice

A firm has zero debt in its capital structure.Its overall cost of capital is 9%.The firm is considering a new capital structure with 40% debt.The interest rate on the debt would be 4%.Assuming that the corporate tax rate is 34%, what
Would its cost of equity capital with the new capital structure be?

• A)10.3%
• B)11.0%
• C)11.2%
• D)13.9%
• E)None of the above.

---

Definitions:

Chemical Conditions

Refers to the specific chemical environment or parameters that influence the behaviour and state of a substance or system.

Convergent Evolution

The evolutionary process where organisms not closely related independently evolve similar traits due to having to adapt to similar environments or ecological niches.

Distantly Related

Distantly related organisms share a common ancestor far back in their evolutionary history, indicating they are part of different subgroups within a broader taxonomic category.

Similar Environments

Refers to ecosystems or habitats that share comparable characteristics, such as climate, vegetation types, or geographical features.