A Firm Has a Capital Structure with $75 Million in Equity

question 8

Multiple Choice

A firm has a capital structure with $75 million in equity and $75 million of debt. The cost of equity capital is 10% and the pretax cost of debt is 7%. If the marginal tax rate of the firm is 35%, compute the weighted average cost of capital of the firm.

• A) 7.3%
• B) 7.6%
• C) 8.0%
• D) 8.4%

---

Definitions:

Returns to Scale

The rate at which output increases in response to proportional increases in all inputs or resources, reflecting the production efficiency of a firm.

Long-Run Average Total Cost

The per unit cost of production in the long run, where all inputs, including capital, are variable.

Slope

The measure of the steepness, incline, or grade of a line, often calculated as the ratio of the vertical change to the horizontal change.

Diseconomies of Scale

Occur when a company or business grows so large that the costs per unit increase.