A Firm Has Zero Debt and an Overall Cost of Capital

question 65

Multiple Choice

A firm has zero debt and an overall cost of capital of 11.7 percent.The firm is considering a new capital structure with 45 percent debt at an interest rate of 6.8 percent.Assume there are no taxes or other imperfections.What will be the levered cost of equity?

• A)16.47%
• B)14.67%
• C)15.80%
• D)15.71%
• E)16.16%

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Definitions:

Service Company

A business that earns revenue by providing intangible products or services, as opposed to selling physical goods.

Indirect Labor

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

Direct Labor-Hours

The total time workers spend directly manufacturing a product.

Spending Variance

The difference between the actual spending and the budgeted or planned spending in a given period.