A Firm Uses Only Debt and Equity in Its Capital

question 108

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 75%. The firm's cost of equity is 16% and it has a tax rate of 30%. If the firm's WACC is 13%, what is the firm's before-tax cost of debt?

• A) 6.89%
• B) 6.28%
• C) 5.97%
• D) 5.71%

---

Definitions:

Analytical Approach

A method of problem solving that involves breaking down a system into its smallest parts and understanding how those parts relate to one another.

Bootstrap Tool

A statistical method or software tool used for estimating the sampling distribution of an estimator by resampling with replacement from the original data.

Crystal Ball

A metaphor often used to describe the unpredictability of future events or outcomes.

Sampling Distributions

Describes the probability distribution of a statistic (like a mean or variance) obtained from a large number of samples drawn from a specific population.