M&M Proposition 2: Rubber Chicken Inc

question 56

Multiple Choice

M&M Proposition 2: Rubber Chicken Inc. currently has a capital structure that is 40% debt and 60% equity. If the firm's cost of equity is 12%, the cost of debt is 8%, and the risk-free rate is 3%, what is the appropriate WACC?

• A) 8.4%
• B) 9.6%
• C) 10.4%
• D) 9.2%

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Definitions:

Bond Retirement

The process by which an issuer fulfills its obligational repayment of the principal amount of a bond before its maturity date.

Interest Expense

The cost incurred by an entity for borrowed funds, referring to the interest paid on debt.

Effective-interest Method

A method for calculating the interest expense on a bond that involves allocating the bond's interest expense over its life in a way that yields a constant rate of interest.

Book Value

Book Value is the value of an asset according to its balance sheet account balance, taking into account the cost of the asset minus its depreciation.