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

question 65

Multiple Choice

The required return on equity for an all-equity firm is 10.0%. They currently have a beta of one and the risk-free rate is 5% and the market risk premium is 5%. 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 beta if this firm changes capital structure.

• A)1.12
• B)1
• C)7.4%
• D)None of the above

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Definitions:

Interest Recognize

The accounting practice of recording interest earned or incurred in the period it is applicable, regardless of when it is paid.

Note Accepted

A written promise to pay a specified amount of money, known as a promissory note, which has been accepted or endorsed.

Accrued Interest

Interest that has been incurred but not yet paid, typically relating to bonds or loans, calculated from the last payment date up to the current date.

Note Payable

A liability in written form that promises to pay a specified amount of money at a future date.