A Firm Is Unlevered and Has a Cost of Equity

question 72

Multiple Choice

A firm is unlevered and has a cost of equity capital of 9%.What is the cost of equity if the firm becomes levered at a debt-equity ratio of 2? The expected cost of debt is 7%.(Assume no taxes.)

• A)15.0%
• B)16.0%
• C)14.5%
• D)13.0%

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Definitions:

Width

Width refers to the measurement or extent of something from side to side; in geometry, it is often used to describe the shorter side of a rectangle.

Division

A mathematical operation that is the inverse of multiplication; it involves splitting a quantity into equal parts.

Simplify

Reducing an expression or equation to its simplest form, often by combining like terms and applying arithmetic operations.

Polynomial

An algebraic expression consisting of variables and coefficients, involving operations of addition, subtraction, multiplication, and non-negative integer exponents.