A Firm Uses Only Debt and Equity in Its Capital

question 102

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of debt is 40 percent. The firm could issue new bonds at a yield to maturity of 9 percent and the firm has a tax rate of 30 percent. If the firm's WACC is 11 percent, what is the firm's cost of equity?

• A)15.92 percent
• B)14.13 percent
• C)15.03 percent
• D)15.68 percent

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Definitions:

Monopolistic Competition

A market structure characterized by many firms selling products that are similar but not identical, allowing for significant degrees of market power and product differentiation.

Oligopoly

A market structure characterized by a small number of firms which dominate the market, leading to limited competition and often high prices.

Four-firm Concentration Ratio

A measure that expresses the total market share held by the four largest firms within an industry.

Herfindahl Index

A calculation of how concentrated a market is, achieved by adding together the market share squares of every firm within that industry.