A Firm Uses Only Debt and Equity in Its Capital

question 18

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 35 percent. The firm's cost of equity is 14 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)13.41 percent
• B)6.10 percent
• C)5.50 percent
• D)(-3.00 percent)

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Definitions:

Loss

An economic condition where expenses exceed revenues, resulting in negative profit.

Price Discrimination

Price discrimination is the strategy of selling the same product at different prices to different groups of consumers, often based on their willingness to pay, location, or purchase volume.

Disguised Subsidy

Financial support given to industries or businesses in indirect ways, not easily identifiable as traditional subsidies, to lower their costs or increase their competitiveness.

Consumer Surplus

The gap between the total sum consumers are prepared and financially able to spend on a good or service and the sum they actually spend.