Asked by Chasity Martin on Jun 20, 2024
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A firm is worth $1,400, has a 35% tax rate, total debt of $600, an unlevered return of 15%, and a cost of debt of 9%. What is the cost of equity?
A) 12.07%
B) 16.67%
C) 17.93%
D) 18.75%
E) 20.20%
Unlevered Return
A return on investment that doesn't account for debt, measuring the performance of an investment as if no borrowing took place.
Cost of Equity
The return a firm theoretically pays to its equity investors to compensate them for the risk they undertake by investing in the company.
Total Debt
The sum of all short-term and long-term liabilities owed by an entity.
- Gain an understanding of the theories and mathematical processes associated with equity cost and leverage consequences.
- Evaluate the effect of taxation on the cost of a firm’s capital and its broad financial decision-making.
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Learning Objectives
- Gain an understanding of the theories and mathematical processes associated with equity cost and leverage consequences.
- Evaluate the effect of taxation on the cost of a firm’s capital and its broad financial decision-making.
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