The Required Return on Equity for a Levered Firm Is

question 10

Multiple Choice

The required return on equity for a levered firm is 10.60%. The debt to equity ratio is ½ the tax rate is 40%, the pre-tax cost of debt is 8%. Find the cost of capital if this firm were financed entirely with equity.

• A)10%
• B)12%
• C)8.67%
• D)None of the above

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Definitions:

Debt Ratio

A financial ratio that measures the proportion of a company's assets that are financed by debt.

Assets

Economic resources owned or controlled by an individual or entity that are expected to produce value or benefit in the future.

EBIT

Earnings Before Interest and Taxes, a measure of a firm's profit that includes all expenses except interest and income tax expenses.

Interest

The charge for borrowing money or the return on invested capital, typically expressed as an annual percentage rate.