A Firm Has Zero Debt in Its Capital Structure

Multiple Choice

A firm has zero debt in its capital structure. Its overall cost of capital is 9%. The firm is considering a new capital structure with 40% debt. The interest rate on the debt would be 4%. Assuming that the corporate tax rate is 34%,what would the cost of equity capital with the new capital structure be?

A) 10.3%
B) 11.0%
C) 11.2%
D) 13.9%
E) None of these.