A Firm Requires an Investment of $20,000 and Borrows $10,000

question 56

Multiple Choice

A firm requires an investment of $20,000 and borrows $10,000 at 8%.If the return on equity is 20%,what is the firm's pre tax WACC?

• A)14%
• B)15%
• C)16%
• D)17%

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Definitions:

Common Stockholders

These are investors who own shares of a company's common stock, granting them voting rights and a portion of the company's profits through dividends.

Hybrid Security

A financial instrument that combines characteristics of both equity and debt securities, offering a blend of risk and return features.

Preferred Stock

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock.

Bonds

Fixed-income securities representing a loan made by an investor to a borrower, typically corporate or governmental.