Using the Original Modigliani and Miller Assumptions If a Firm's

question 103

Multiple Choice

Using the original Modigliani and Miller assumptions if a firm's cost of capital is 12% when it is all equity financed and it's cost of debt is 8%, the cost of equity will be ________% when the firm is financed with equal amount of debt and equity.

• A) 12%
• B) 24%
• C) 16%
• D) cannot be determined with the information given.

---

Definitions:

Perfectly Competitive

A market structure characterized by many buyers and sellers, homogeneous products, free entry and exit, and perfect information, leading to firms being price takers.

Equilibrium Wage

The pay rate where the amount of labor provided is equal to the amount of labor required.

Marginal Product

The additional output resulting from the use of one more unit of a variable input, such as labor or capital.

Equilibrium Wage

The salary point at which labor supply aligns perfectly with labor demand.