A Firm Uses Only Debt and Equity in Its Capital

question 6

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 70 percent. The firm's cost of equity is 13 percent and it has a tax rate of 30 percent. If the firm's WACC is 11 percent, what is the firm's before-tax cost of debt?

• A)7.17 percent
• B)9.05 percent
• C)6.38 percent
• D)5.36 percent

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Definitions:

Uncertain Environment

An environment that lacks so much information that it is difficult to assign probabilities to the likely outcomes of alternatives.

Probabilities

The measure of the likelihood that an event will occur, often expressed as a number between 0 and 1.

Nonprogrammed Decision

A decision made in response to situations that are unique, relatively unstructured, and undefined, often requiring creative problem-solving.

New Market

Refers to either a completely unexplored market sector or geographic area where a product, service, or business can expand.