An Unlevered Firm Has Expected Earnings of $2,401 and a Market

question 27

Multiple Choice

An unlevered firm has expected earnings of $2,401 and a market value of equity of $19,600.The firm is planning to issue $4,000 of debt at 6 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?

• A)10.99%
• B)11.08%
• C)13.85%
• D)13.97%
• E)12.25%

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Definitions:

Sales Opportunity

A potential future sale or revenue-generating event that is identified after qualifying a lead, indicating the chance to sell a product or service to a prospect.

Expensive-To-Reach

Describes a target market segment that is costly to access, often due to geographic, demographic, or psychographic barriers.

Sales Potential

The estimated maximum total sales revenue of a product or service in a specific market over a set period.

EBIAT

Earnings Before Interest After Taxes, a measure of a company's profitability that excludes interest expenses but includes taxes.