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:

Discretionary Policies

Economic policies based on judgment and choices by policymakers rather than set rules, often involving government spending and taxation decisions.

Policy Rules

Prescriptive guidelines or principles designed to guide decisions and achieve rational outcomes within an organization or government.

Monetarists

Economists who argue that the money supply's variations play a crucial role in influencing the national output in the short term and determining the price level over the long term.

Money Supply

The whole sum of money available in an economy, including cash, coins, and the balances in checking and savings accounts, at a specific period.