A Firm Has Zero Debt in Its Capital Structure

question 64

Multiple Choice

A firm has zero debt in its capital structure.Its overall cost of capital is 9%.The firm is considering a new capital structure with 40% debt.The interest rate on the debt would be 4%.Assuming that the corporate tax rate is 34%, what would its cost of equity capital with the new capital structure be?

• A)10.3%
• B)11.0%
• C)11.2%
• D)13.9%
• E)None of the above.

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