Suppose a Firm Has a Cost of Equity of 12

question 32

Multiple Choice

Suppose a firm has a cost of equity of 12%, a D/E ratioof 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 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

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Definitions:

Price of Labor

The wage rate or compensation paid to employees for their work or services, determined by supply and demand in the labor market.

Isocost Line

A line that represents all combinations of inputs which cost the same total amount.

Capital

Resources, such as equipment, buildings, and machinery, used in production to create goods and services.

Labor

The human effort, both physical and mental, that is used in the production process to create goods and services.