The Current Market Rate of Return Is 12% and the Risk-Free

question 58

Multiple Choice

The current market rate of return is 12% and the risk-free rate is 4%. You have been given the job of determining your firm's cost of capital components. The company has 1 million shares outstanding with a current value of $22.50 per share. The debt represents 30% of the capital structure and the yield to maturity is 12%. The b of the equity is 1.4 and the tax rate if 30%. What is the required rate of return on equity?

• A) 9.6%
• B) 14.4%
• C) 15.2%
• D) 18.56%

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Definitions:

Scoria Cone

A small, steep volcanic cone built from lava fragments (scoria) ejected during gas-charged explosive eruptions.

Pumice

A light, porous volcanic rock formed from explosive eruptions, known for its ability to float on water.

Welded Tuff

A type of rock formed from volcanic ash ejected during an eruption, which then falls and welds together under high temperature and pressure.

Feldspar

A group of rock-forming silicate minerals that make up a significant portion of the Earth's crust, commonly found in igneous, metamorphic, and sedimentary rocks.