A Firm Is Financed with 100% Equity and Its Cost

question 35

Multiple Choice

A firm is financed with 100% equity and its cost of capital is 12%. What will be the cost of capital if the firm issues debt at a cost of 6% and uses the proceeds to repurchase half of the
Firm's outstanding equity?

• A)8%
• B)12%
• C)9%
• D)This cannot be determined with the information provided.

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Definitions:

Marginal Utility per Dollar

The additional satisfaction or utility gained from consuming one more unit of a good or service, divided by its cost.

Potatoes

Tubers of the plant Solanum tuberosum, widely used as a staple food item, grown in various parts of the world.

Clams

Marine or freshwater mollusks with a bivalve shell, often used as food.

Marginal Utility

The surplus satisfaction or utility experienced by an individual from consuming an extra unit of a particular good or service.