What Is the Maximum Rate That Can Be Paid on Debt

question 47

Multiple Choice

What is the maximum rate that can be paid on debt and maintain a WACC of 14% with an expected return on equity of 19% in a firm with a debt-to-asset ratio of 60%? Ignore taxes.

• A) 6.50%
• B) 9.90%
• C) 10.67%
• D)11.14%

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Definitions:

Yield

The income return on an investment, such as the interest or dividends received, expressed as an annual percentage of the investment’s cost.

Cost of Debt

The effective rate that a company pays on its current debt, including loans and bonds, which can be measured before or after taxes.

Annual Coupon

The annual interest payment made to bondholders, expressed as a percentage of the bond's face value.

Face Value

The nominal value printed on a bond or stock certificate that indicates the amount due at maturity for bonds or the value of a share of a stock.