Rearden Metal Currently Has No Debt and an Equity Cost

question 93

Multiple Choice

Rearden Metal currently has no debt and an equity cost of capital of 14%.Suppose that Rearden decides to increase its leverage and maintain a market debt-to-value ratio of 1/2.Suppose Rearden's debt cost of capital is 8% and its corporate tax rate is 40%.Assuming that Rearden's pre-tax WACC remains constant,then with the addition of leverage its effective after-tax WACC will be closest to:

• A)10.8%
• B)12.4%
• C)12.8%
• D)13.4%

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Definitions:

Marginal Utility

The supplementary benefit or satisfaction a person derives from the consumption of one more unit of a good or service.

Optimal Time Allocation

The most efficient distribution of one's time across various activities to maximize overall benefit.

Substitution Effect

The change in the quantity of a good consumed as the consumer substitutes other goods that are now relatively cheaper in place of the good that has become relatively more expensive.

Leisure

The time available for purposes other than earning money to buy marketed goods.