Granite Works Maintains a Debt-Equity Ratio of 0

question 97

Multiple Choice

Granite Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32 percent.The firm does not issue preferred stock.The pre-tax cost of debt is 9.8 percent.There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share.The current market risk premium is 8.5 percent and the current risk-free rate is 3.6 percent.This year,the firm paid an annual dividend of $1.10 a share and expects to increase that amount by 2 percent each year.Using an average expected cost of equity,what is the weighted average cost of capital?

• A)8.44 percent
• B)8.78 percent
• C)8.96 percent
• D)9.13 percent
• E)9.20 percent

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Definitions:

Salary Allowances

Fixed amounts of money or compensations over and above regular salaries or wages that employees are entitled to receive under certain conditions or for specific purposes.

Original Investments

The initial amount of money used to purchase an asset or start a project, business, or investment.

Net Income

The profit of a company after all revenues, costs, and expenses have been deducted from total sales.

Salary Allowances

Compensation over and above regular salary payments that might be paid for special duties, skills, or for certain expenses.