A Newly Appointed CFO of a Company Tells You That

question 29

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:

Equity Method

An accounting technique used by a company to record its investment in another company when it has significant influence but does not have full control or majority ownership.

Income Tax Allocation

Refers to the process of assigning income tax expense or benefit to various components of an organization's financial statements.

Balance Sheet

A financial statement that shows a company's financial position at a specific point in time, detailing assets, liabilities, and shareholders' equity.

Cost Method

An accounting approach used for investments, where the investment is recorded at its original purchase cost without considering changes in its market value.