A Firm Has a Debt-To-Equity Ratio of 1

question 45

Multiple Choice

A firm has a debt-to-equity ratio of 1.20. If it had no debt, its cost of equity would be 15%. Its cost of debt is 10%. What is its cost of equity if there are no taxes or other imperfections?

• A) 21%.
• B) 18%.
• C) 15%.
• D) 10%.

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Definitions:

Unlimited Liability

A legal obligation where business owners and investors are personally responsible for all of the debts of the business.