If a Firm Is Unlevered and Has a Cost of Equity

question 36

Multiple Choice

If a firm is unlevered and has a cost of equity capital of 12%, what would its cost of equity be if its debt-equity ratio became 2? The expected cost of debt is 8%.

• A)14.0%
• B)14.67%
• C)16.0%
• D)20.0%
• E)None of the above.

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Definitions:

Adjusting Entry

A journal entry made in accounting records at the end of an accounting period to allocate income and expenses to the periods in which they actually occurred.

Rent Expense

The cost incurred by a business to utilize property or equipment for operational purposes, recognized as an expense on the income statement.

Accrual Adjusting Entry

An accounting entry made to record revenues that have been earned or expenses that have been incurred but not yet recorded through the normal transaction process.

Interest Expense

The financial charge for the use of borrowed capital, reflected in the income statement.