A Levered Firm Has a Pretax Cost of Debt of 6.8

question 34

Multiple Choice

A levered firm has a pretax cost of debt of 6.8 percent and an unlevered cost of capital of 13.4 percent.The tax rate is 34 percent,and the cost of equity is 16.06 percent.What is the debt-equity ratio?

• A)0)57
• B)0)45
• C)0)51
• D)0)47
• E)0)61

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Definitions:

Future Cash Flows

Expected cash receipts and payments a business anticipates receiving or paying out over a future period.

Bias

A preconception or inclination towards something, potentially leading to unfair judgments or decisions in various contexts.

Incremental Overhead

The additional indirect costs incurred due to a change in business activities, such as an increase in production volume.

Income Taxes

Taxes levied by a government directly on income, especially an annual tax on personal or corporate earnings.