What Is Its Cost of Equity for a Firm If

question 7

Multiple Choice

What is its cost of equity for a firm if the corporate tax rate is 40%? The firm has a debt-to-equity ratio of 1.5. If it had no debt, its cost of equity would be 16%. Its current cost of debt is 12%.

• A) 22.0%.
• B) 18.4%.
• C) 17.44.
• D) 19.6%.

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Definitions:

Elastic

Describes a situation where the demand for a good or service significantly changes in response to a change in price.

Optimal Tax

A taxation principle aiming to maximize economic efficiency without imposing undue burdens or distortions.

Deadweight Loss

Economic efficiency loss occurring when free market equilibrium is not achieved for a good or service.

Revenues

The income generated from normal business operations and includes discounts and deductions for returned merchandise.