A Firm Has Zero Debt in Its Capital Structure

question 47

Multiple Choice

A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes or other imperfections, its cost of equity capital with the new capital structure would be:

• A) 9%.
• B) 14%.
• C) 13%.
• D) 10%.

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Definitions:

Printing Press

A mechanical device developed in the 15th century that allowed for mass production of printed materials, significantly impacting information dissemination and literacy rates.

Perspective

A specific attitude towards or way of regarding something; a point of view.

Active Participant

A person who engages directly and dynamically in an activity or process, rather than observing.

Focus

The concentration of attention or energy on something specific, leading to greater efficiency in achieving a goal.