If a Firm Is Unlevered and Has a Cost of Equity

question 43

Multiple Choice

If a firm is unlevered and has a cost of equity capital of 13.7 percent,what would be the cost of equity if its debt-equity ratio was revised to .4? The expected cost of debt is 7.4 percent and there are no taxes.

• A)15.54 percent
• B)15.67 percent
• C)16.09 percent
• D)16.22 percent
• E)16.36 percent

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Definitions:

Break-even Point

The level of production or sales at which total costs equal total revenue, resulting in no net loss or gain.

Contribution Margin

This represents the amount of revenue left over after deducting variable costs, which can be used to cover fixed costs and contribute to profits.

Variable Costs

Costs that change in proportion to the level of activity of a business, such as material and labor costs.

Break-even Point

The point at which total revenues equal total costs, resulting in neither profit nor loss, indicating the minimum sales volume necessary to cover all costs.