A Firm Has Zero Debt in Its Capital Structure

question 34

Multiple Choice

A firm has zero debt in its capital structure. Its overall cost of capital is 10 percent. The firm is considering a new capital structure with 60 percent debt. The interest rate on the debt would be 8 percent. Assuming there are no taxes, its cost of equity capital with the new capital structure would be

• A)8 percent.
• B)16 percent.
• C)13 percent.
• D)10 percent.

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Definitions:

Private Debt

consists of loans and debt financing not traded on open markets, often issued to finance business operations or acquisitions, typically by private companies or individuals.

OSC Registration

The process by which individuals or firms must register with the Ontario Securities Commission to legally trade or underwrite securities in Ontario, Canada.

Restrictive Covenants

Provisions in a loan or bond agreement that limit certain actions of the borrower to protect the interests of the lender.

Seasoned Equity Offering

The process by which a company that is already publicly traded offers additional shares to the market.