The Cost of Capital of Firm a Is 11

Multiple Choice

The cost of capital of Firm A is 11.2 percent compared to 14.1 percent for Firm B.The market rate of return is 10.8 percent and the risk-free rate is 4 percent.Firm A is considering the acquisition of Firm B.Should this acquisition occur,it will be financed with debt at an interest cost of 8.7 percent.Which of these rates is most appropriate to use as the discount rate when analyzing the acquisition of Firm B by Firm A?

A) 8.7%
B) 11.2%
C) 10.8%
D) 14.1%
E) 4.0%