If a Firm Is Unlevered and Has a Cost of Equity

question 40

Multiple Choice

If a firm is unlevered and has a cost of equity capital of 12%,what would its cost of equity be if its debt-equity ratio became 2? The expected cost of debt is 9%.

• A)14.0%
• B)14.67%
• C)16.0%
• D)20.0%
• E)None of the above.

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Definitions:

Taxes

A compulsory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Limited Liability Company

An organizational form blending a corporation's limited liability feature with the pass-through tax benefits of a partnership or sole proprietorship.

Manager Liability

The responsibility and potential legal accountability of managers for actions taken within the scope of their managerial roles.

Limited Liability Company

A corporate structure that integrates the limited liability characteristic of a corporation with the tax-pass-through trait of sole proprietorships or partnerships.