A Firm Undertakes an Investment That Is Financed with $10,000

question 113

Multiple Choice

A firm undertakes an investment that is financed with $10,000 of equity and $30,000 of debt.If the return on equity is 14%,the cost of debt is 7% and the tax rate is 25%,what is the firm's WACC?

• A)6.76%
• B)9.92%
• C)7.00%
• D)8.75%
• E)7.44%

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Definitions:

Cash Flows

The gross flow of cash and assets equivalent to cash moving into and away from a business operation.

Payback Period

Payback period is the amount of time it takes for an investment to generate an amount of cash flow equal to the original investment amount.

Net Cash Inflows

The amount of cash that a business receives over a period, minus the amount of cash outflows.

Inventory Cost

Inventory cost includes the costs associated with purchasing, storing, and managing goods that a business intends to sell; it typically comprises the purchase price, warehousing costs, and any other expenses related to holding inventory.