The Required Return on Equity for an All-Equity Firm Is

question 34

Multiple Choice

The required return on equity for an all-equity firm is 10.0%. They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%, the pre-tax cost of debt is 8%. Find the new cost of capital if this firm changes capital structure.

• A)14.93%
• B)8.67%
• C)7.40%
• D)None of the above

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Definitions:

Utility Function

A utility function is an economic model that relates the satisfaction or utility a consumer derives from consuming specific quantities of goods and services.

Whisky Consumption

It refers to the amount of whisky that is consumed over a given period of time, indicating the demand for this specific alcoholic beverage.

Rawlsian Social Welfare Function

A concept based on John Rawls' theory of justice, prioritizing the well-being of the least advantaged members of society in the allocation of resources.

Utility

In economics, utility is a measure of the satisfaction or happiness that a consumer derives from consuming goods and services.