The Pizza Shoppe Has Debt with Both a Face and Market

question 42

Multiple Choice

The Pizza Shoppe has debt with both a face and market value of $24,000 and a coupon rate of 6.4 percent.The expected earnings before interest and taxes are $21,400,the tax rate is 35 percent,and the unlevered cost of capital is 11.4 percent.What is the firm's cost of equity?

• A)13.25%
• B)12.89%
• C)13.92%
• D)12.13%
• E)14.25%

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Definitions:

Accounts Receivable Period

The average number of days it takes for a company to collect payments from its customers after a sale has been made, a key component in managing cash flow.

Letter of Credit

A financial document issued by a bank guaranteeing a buyer's payment to a seller in a transaction, effective in international trade.

Covenants

A promise by the firm, included in the debt contract, to perform certain acts. A restrictive covenant imposes constraints on the firm to protect the interests of the debtholder.