A Company's CFO Wants to Maintain a Target Debt-To-Equity Ratio

question 21

Multiple Choice

A company's CFO wants to maintain a target debt-to-equity ratio of 1/4. If the WACC is 18.6%, and the pretax cost of debt is 9.4%, what is the cost of common equity assuming a tax rate of 34%?

• A) 19.90%
• B) 20.90%
• C) 21.70%
• D)22.73%

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Definitions:

Main Purpose Doctrine

A legal principle that a promise to pay the debt of another does not need to be in writing if the guarantor's main purpose benefits themselves.

Statute of Frauds

A legal principle requiring certain contracts to be in writing and signed by the party to be charged to be enforceable.

Oral Contract

An agreement between parties that is spoken, not written, but is still legally binding.

Customized Goods

Products that are specifically made according to the specifications or requirements of a customer.