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:

Allowance Method

An accounting technique used to estimate and account for potential uncollectible accounts receivable.

Direct Write-off Method

An accounting practice where uncollectible accounts receivable are directly removed from the books at the time they are deemed nonrecoverable.

Days' Sales in Receivables

A financial ratio that measures the average number of days that receivables remain outstanding before being collected.

Trade Receivables

Amounts owed to a business by its customers for goods or services delivered on credit.