Suppose a Firm Has a Cost of Equity of 12

question 52

Multiple Choice

Suppose a firm has a cost of equity of 12%, a D/E ratio of 1/6, and the YTM on its bonds is 7.5%. The risk-free rate is currently 3%. What is the current required rate of return on its assets and equity if the D/E ratio is changed to 1/3? (Round the answer to one decimal place of percentage.)

• A) 11.35% and 13.25%
• B) 11.35% and 8.25%
• C) 13.25% and 11.35%
• D) None of the above

---

Definitions:

Conversion Cost

Conversion cost is the sum of direct labor and manufacturing overhead costs incurred to convert raw materials into finished goods.

Product Cost

The expenses incurred to create a product, including direct materials, direct labor, and manufacturing overhead.

Direct Materials

Raw materials that can be directly traced to the manufacturing of a product.

Period Cost

Costs that are expensed in the period in which they are incurred, as opposed to being capitalized or included in the cost of goods sold.