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

---

Definitions:

Unequal Voting Rights

A situation where shares are divided into classes, each with varying degrees of voting power in the company's decisions.

Lower Priority

A status indicating that a task or obligation is considered less important or urgent compared to others and can be addressed or fulfilled later.

Common Shares

Equity securities representing ownership in a company, entitling the holder to vote on corporate matters and share in the company’s profits.

Residual Assets

Assets that remain after all liabilities have been settled, typically referring to what shareholders own in a company.