Reference no: EM132020270

Part A

If D represents debt, E represents equity, and the firm has no preferred stock, then the capital structure weight of equity is computed as:

A. E/D

B. E/(D+E)

C. E/(D+E+P)

D. E/ (E+P)

Part B

If a firm’s before-tax cost of debt is 10% and the firm has a 21% marginal tax rate, what is the firm’s after-tax cost of debt?

A. 6.5%

B. 3.5%

C. 10.0%

D. 7.9%

Part C

A company has preferred stock that can be sold for $100 per share. The preferred stock pays a quarterly dividend $1.5. Therefore, the cost of preferred stock is:

A. 4.0%

B. 5.0%

C. 6.0%

D. 10.0%

Part D

Suppose your company has an equity beta of 0.5 and the current risk-free rate is 3.0%. If the expected market risk premium is 8.6%, what is your cost of equity capital?

A. 7.3%

B. 8.6%

C. 11.1%

D. 10.3%.