Southwest Tours Currently Has a Weighted Average Cost of Capital

question 18

Multiple Choice

Southwest Tours currently has a weighted average cost of capital of 11.3 per cent based on a combination of debt and equity financing.The firm has no preference shares.The current debt-equity ratio is 0.58 and the after-tax cost of debt is 6.4 per cent.The company just hired a new CEO who is considering eliminating all debt financing.All else constant,what will the firm's cost of capital be if the firm switches to an all-equity firm?

• A)12.89 per cent
• B)11.45 per cent
• C)12.62 per cent
• D)14.14 per cent
• E)13.37 per cent

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Definitions:

Saltwater Intrusion

The movement of saline water into freshwater aquifers, which can lead to contamination of drinking water sources and other consequences.

Dams

Structures built across rivers or streams to control water flow, used for water storage, flood prevention, and electricity generation.

Irrigated Land

Agricultural land that is supplied with water through artificial means to promote crop growth.

Salinity

The concentration of dissolved salts in a given volume of water.