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

question 10

Multiple Choice

A firm has a debt-to-equity ratio of 1.75. If it had no debt,its cost of equity would be 9%. Its cost of debt is 7%. What is its cost of equity if the corporate tax rate is 50%?

• A) 7.73%
• B) 10.00%
• C) 10.75%
• D) 12.50%
• E) None of these.

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Definitions:

Standard Deviation

A measure of the dispersion or variability of a set of data points, indicating how spread out the values are from the mean of the data set.

Biased Estimates

Estimates that are systematically off-target in a certain direction due to errors in methodology or sample selection.

Absolute Value

The non-negative value of a number without regard to its sign; for example, the absolute value of both -5 and 5 is 5.

Variance

A statistical measure that represents the degree of spread or variability of a data set, by calculating the average of the squared differences from the mean.