Southwest Tours Currently Has a Weighted Average Cost of Capital

question 10

Multiple Choice

Southwest Tours currently has a weighted average cost of capital of 11.3 percent based on a combination of debt and equity financing. The firm has no preferred stock. The current debt-equity ratio is 0.58 and the aftertax cost of debt is 6.4 percent. The company just hired a new president who is considering eliminating all debt financing. All else constant, what will the firm's cost of capital be if the firm switches to an all-equity firm?

• A) 11.45 percent
• B) 12.62 percent
• C) 12.89 percent
• D) 13.37 percent
• E) 14.14 percent

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