A Firm Uses Only Debt and Equity in Its Capital

question 89

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 75 percent. The firm's cost of equity is 16 percent and it has a tax rate of 30 percent. If the firm's WACC is 13%, what is the firm's before-tax cost of debt?

• A)6.89 percent
• B)6.28 percent
• C)5.97 percent
• D)5.71 percent

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Definitions:

Optimism

The tendency to maintain a generally hopeful outlook and to expect positive outcomes.

Type A Personality

A personality type characterized by competitiveness, urgency, aggression, and a constant sense of urgency.

Learned Helplessness

A situation in which someone endures a profound sense of being powerless, frequently due to undergoing a traumatic experience or constant lack of success.

Pessimism

A tendency to see the worst aspect of things or believe that the worst will happen, encompassing a lack of hope or confidence in the future.