A Firm Uses Only Debt and Equity in Its Capital

question 6

Multiple Choice

A firm uses only debt and equity in its capital structure. The firm's weight of equity is 70 percent. The firm's cost of equity is 13 percent and it has a tax rate of 30 percent. If the firm's WACC is 11 percent, what is the firm's before-tax cost of debt?

• A)7.17 percent
• B)9.05 percent
• C)6.38 percent
• D)5.36 percent

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Definitions:

Zero-balance Account

A checking account in which a balance of zero is maintained by automatically transferring funds from a master account in an exact amount to cover checks presented.

Float Management

Strategies employed by companies to manage the time between issuing and cashing payments to optimize available cash flow.

NPV

NPV is a calculation that determines the expected financial profitability of a given investment or project by assessing the difference between the current value of all incoming and outgoing cash flows.

Positive NPV Projects

Projects with a net present value greater than zero, indicating they are expected to generate profit over their lifetime.