Calculate a Firm's WACC Given That the Total Value of the Firm

question 56

Multiple Choice

Calculate a firm's WACC given that the total value of the firm is $2 million,$600,000 of which is debt,the pre-tax cost of debt is 10%,and the cost of equity is 15%.The firm pays no taxes.

• A) 9.0%
• B) 11.5%
• C) 13.5%
• D) 14.4%

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Definitions:

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Behavioral Economics

The branch of economic theory that combines insights from economics, psychology, and biology to make more accurate predictions about human behavior than conventional neoclassical economics, which is hampered by its core assumptions that people are fundamentally rational and almost entirely self-interested. Behavioral economics can explain framing effects, anchoring, mental accounting, the endowment effect, status quo bias, time inconsistency, and loss aversion.

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Neoclassical Economics

The dominant and conventional branch of economic theory that attempts to predict human behavior by building economic models based on simplifying assumptions about people’s motives and capabilities. These include that people are fundamentally rational; motivated almost entirely by self-interest; good at math; and unaffected by heuristics, time inconsistency, and self-control problems.