A Firm Has a Capital Structure with $50 Million in Equity

question 38

Multiple Choice

A firm has a capital structure with $50 million in equity and $100 million of debt.The cost of equity capital is 12% and the pretax cost of debt is 7%.If the marginal tax rate of the firm is 40%,compute the weighted average cost of capital of the firm.

• A)5.6%
• B)6.3%
• C)6.8%
• D)7.7%

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Definitions:

Independent Variables

Variables in an experiment or study that are manipulated or categorized by the researcher to determine their effect on dependent variables.

Durbin-Watson Statistic

A test statistic used to identify the presence of autocorrelation (correlation of adjacent residuals) in the residuals from a regression analysis.

First-Order Autocorrelation

A statistical measure of the relationship between a variable's current value and its immediate previous value.

Durbin-Watson Test

A statistical method designed to identify the existence of autocorrelation with a single lag in the residuals resulting from a regression study.