What Proportion of a Firm Is Equity Financed If the WACC

question 130

Multiple Choice

What proportion of a firm is equity financed if the WACC is 14%, the after-tax cost of debt is 7.0%, the tax rate is 35%, and the required return on equity is 18%?

• A)54.00%
• B)63.64%
• C)70.26%
• D)77.78% 14% = (1 -x)(7%) + (x)18%
• 14% = 7% = 7% + 18%
• 7%/11% = 11%x/11%

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Definitions:

Internal Equity

Refers to the fairness and consistency in pay structures for employees within the same company, ensuring equitable compensation for similar roles and responsibilities.

Salary

A fixed amount of money paid to an employee, usually on a monthly or annual basis, in exchange for their work.

Compensable Factors

Characteristics of a job that are used to determine its value and appropriate compensation, such as skill level and responsibility.

Point System

A form of job evaluation that assesses the relative importance of the job’s key factors in order to arrive at the relative worth of jobs.