A Firm Has Zero Debt in Its Capital Structure

question 6

Multiple Choice

A firm has zero debt in its capital structure.Its overall cost of capital is 13%.The firm is considering a new capital structure with 55% debt.The interest rate on the debt would be 7%.Assuming there are no taxes or other imperfections,its cost of equity capital with the new capital structure would be:

• A)12.00%
• B)13.67%
• C)17.53%
• D)20.33%
• E)None of the above.

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Definitions:

Preferred Stock

A type of ownership in a corporation that has a higher claim on its assets and earnings than common stock, typically with dividends that must be paid out before dividends to common stockholders.

Rate Of Return

A measure of the profit or loss of an investment over a specified period, expressed as a percentage of the investment's initial cost.

Constant Growth

A model assuming a company's dividends will continue to grow at a consistent rate indefinitely.

Dividend

A portion of a company's earnings that is paid to shareholders, usually on a regular basis.