A Company's CFO Wants to Maintain a Target Debt-To-Equity Ratio

question 21

Multiple Choice

A company's CFO wants to maintain a target debt-to-equity ratio of 1/4. If the WACC is 18.6%, and the pretax cost of debt is 9.4%, what is the cost of common equity assuming a tax rate of 34%?

• A) 19.90%
• B) 20.90%
• C) 21.70%
• D)22.73%

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Definitions:

Subsidiary Ledger

A detailed ledger that contains the individual accounts related to a specific main account, aiding in the organization and breakdown of financial information.

Balance Sheet

A ledger entry that captures the financial position of a business, enumerating assets, liabilities, and the stake of shareholders at an exact moment.

Original Investments

The initial amount of money or value of assets put into a business or project by its founders or investors.

Net Income

The total earnings of a company after subtracting all expenses, including taxes and operating costs, from its total revenues.