A Firm Has an Expected Return on Equity of 16

question 32

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 Let x = debt/asset ratio.Then
• )12 = .08x + (1-x).16
• = )08x + .16 - .16x
• )08x/.08 = .04/.08
• X = .50

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Definitions:

Koran

The holy book of Islam, believed to be the word of God (Allah) as dictated to Muhammad over a 23-year period.

Deontological Approach

A philosophical stance emphasizing duty, where the morality of an action is based on adherence to rules or duties rather than the consequences.

Immanuel Kant

An 18th-century German philosopher known for his work in epistemology, ethics, and aesthetics, particularly for his philosophy of the categorical imperative.

Ethics

The study of moral principles that govern an individual's behavior or conducting of an activity.