A Firm Has Zero Debt in Its Capital Structure

question 29

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%, its cost of equity capital with the new capital structure would be?

• A) 10.32%.
• B) 11.20%.
• C) 11.00%.
• D) 13.95%.

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