Using the Cost of Capital and the Debt-Equity Ratio, Illustrate

question 106

Essay

Using the cost of capital and the debt-equity ratio, illustrate how the cost of capital for an unlevered
firm varies from the weighted average cost of capital of a levered firm.

---

Definitions:

Liquid Ratio

A financial metric comparing a company's liquid assets (cash and marketable securities) to its current liabilities, often used to assess liquidity.

Common Size Statement

A financial statement in which each line item is expressed as a percentage of a significant total, facilitating comparison across companies or periods.

Liabilities Plus Equity

Liabilities plus equity represents the total value of a company's financial obligations plus its owners' investments, crucial for understanding its financial health.

Net Income

A company's overall earnings following the deduction of all expenses and taxes from its total revenue.