A Firm Has a Debt-To-Equity Ratio of 1

question 27

Multiple Choice

A firm has a debt-to-equity ratio of 1. Its cost of equity is 16%,and its cost of debt is 8%. If there are no taxes or other imperfections,what would be its cost of equity if the debt-to-equity ratio were 0?

• A) 8%
• B) 10%
• C) 12%
• D) 14%
• E) 16%

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Definitions:

Sisyphus

A figure from Greek mythology who was condemned to repeatedly roll a huge boulder up a hill, only for it to roll back down, symbolizing eternal struggle.

Sigmund Freud

An Austrian neurologist and the founder of psychoanalysis, a method for treating psychopathology through dialogue between a patient and a psychoanalyst.

Unconscious

The part of the mind that is inaccessible to the conscious mind but that affects behavior and emotions.

Goethe

Johann Wolfgang von Goethe, a German writer, poet, playwright, and thinker, known for his contributions to literature, philosophy, and science.