A Firm Has a Debt/equity Ratio of ½

question 75

Multiple Choice

A firm has a debt/equity ratio of ½.The debt pays a 6% rate of interest.The expected rate of return on equity is 12%.What would happen to the expected rate of return if the firm reduced its debt/equity ratio to 1/3?

• A)Rate of return would increase to 11.33%
• B)Rate of return would increase to 12.50%
• C)Rate of return would decrease to 10.60%
• D)Rate of return would decrease to 8.33%

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Definitions:

Quarterly Basis

A time frame used for financial processes, including tax payments and reporting, divided into four equal parts over the year.

FUTA

The Federal Unemployment Tax Act (FUTA) is a United States federal law that imposes a payroll tax on employers to fund state workforce agencies and unemployment insurance.

Medicare Taxes

Taxes that fund Medicare, a federal health insurance program, deducted from the paychecks of employees and also paid by employers.

Wages

Wages refer to the monetary compensation paid by an employer to an employee in exchange for work performed.