A Newly Appointed CFO of a Company Tells You That

question 63

Multiple Choice

A newly appointed CFO of a company tells you that he needs to determine the required return on unlevered equity should his firm completely deliver.He further tells you that the required return on assets is 10% and that his cost of debt is 3% based upon a current borrowed amount of $50,000,000 but he doesn't know the market value of his equity.What is the required return on equity should his firm eliminate all of its debt?

• A) 10.0%
• B) 11.5%
• C) 13.0%
• D) it is impossible to tell

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Definitions:

Break-Even Default Rate

The default rate at which the expected return from a loan equals the cost of the loan, resulting in no profit or loss.

Net 30 Credit Policy

A specific credit term where customers are given 30 days to pay the invoice in full, widely used in business transactions to manage cash flow.

Monthly Interest Rate

The interest rate expressed as a monthly percentage, determining the amount of interest charged or earned per month.

Credit Policy

A set of guidelines that a company follows to determine credit limits and terms for customers, aiming to manage risk and promote sales.