A Firm Has a Capital Structure with $100 Million in Equity

question 73

Multiple Choice

A firm has a capital structure with $100 million in equity and $100 million of debt. The cost of equity capital is 14% and the pre-tax cost of debt is 8%. If the marginal tax rate of the firm is 30%, compute the weighted average cost of capital of the firm.

• A)11.1%
• B)11.7%
• C)10.3%
• D)9.8%

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Definitions:

Return to Risk

A concept comparing the expected returns of an investment to the amount of risk undertaken to capture these returns.

Index Funds

Investment funds designed to replicate the performance of a specific index of stocks or other financial assets.

Event Node

In network analysis or decision trees, a point representing a decision or outcome.

Coefficient of Variation

A statistical measure of the dispersion of data points in a data series relative to its mean, often used to compare the degree of variation from one data series to another.