Debreu Beverages Has an Optimal Capital Structure That Is 70

question 38

Multiple Choice

Debreu Beverages has an optimal capital structure that is 70% common equity, 20% debt, and 10% preferred stock. Debreu's pretax cost of equity is 9%. Its pretax cost of preferred equity is 7%, and its pretax cost of debt is also 5%. If the corporate tax rate is 35%, what is the weighed average cost of capital?

• A)Between 7% and 8%
• B)Between 8% and 9%
• C)Between 9% and 10%
• D)Between 10% and 12%

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Definitions:

Issued Capital

The total value of a company's shares that have been issued to shareholders.

Elimination

The process of removing internal transactions or balances when preparing consolidated financial statements to avoid double counting.

Dividend Elimination

The process of removing the effects of dividends paid by subsidiaries to the parent from consolidated financial statements to avoid double counting.