A Firm Wants to Create a Weighted Average Cost of Capital

question 87

Multiple Choice

A firm wants to create a weighted average cost of capital (WACC) of 10.4 percent. The firm's cost of equity is 14.5 percent and its pre-tax cost of debt is 8.5 percent. The tax rate is 34 percent. What does the debt-equity ratio need to be for the firm to achieve its target WACC?

• A) 0.51
• B) 0.57
• C) 0.62
• D) 0.70
• E) 0.86

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Definitions:

Moral Reasoning

The process by which individuals make decisions about what is right and wrong based on values and principles.

Formal Operational

The stage of cognitive development, according to Piaget, that enables abstract, logical, and systematic thinking, typically emerging in adolescence.

Hypothetically

Involves discussing, reasoning, or theorizing based on conjecture or a supposition, rather than concrete evidence.

Metacognition

The awareness and understanding of one’s own thought processes, often referred to as "thinking about thinking."