A Firm Has an Expected Return on Equity of 16

question 58

Multiple Choice

A firm has an expected return on equity of 16% and an after-tax cost of debt of 8%.What debt-equity ratio should be used in order to keep the WACC at 12%?

• A) .50
• B) .75
• C) 1.00
• D) 1.50

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Definitions:

Work in Process

Inventory that is in the production process but is not yet completed.

Overapplied

A situation where the allocated amount of indirect costs exceeds the actual amount incurred.

Underapplied

A situation where the applied manufacturing overhead is less than the actual manufacturing overhead incurred, indicating that the costs have not been fully allocated.

Predetermined Overhead Rate

A rate calculated before the accounting period begins, used to allocate overhead costs to products or job orders based on a chosen activity base.