For a Firm That Has Both Debt and Equity in Its

Multiple Choice

For a firm that has both debt and equity in its capital structure,its financing cost can be represented by the weighted average cost of capital that is computed by:

A) weighing the pre-tax borrowing cost of the firm and the cost of equity capital, using the debt as the weight.
B) weighing the after-tax borrowing cost of the firm and the cost of equity capital, using the capital structure ratio as the weight.
C) $\mathrm { K } = ( 1 - \mathrm { L } ) \mathrm { K } _ { \mathrm { i } } + \mathrm { L } ( 1 - \mathrm { t } ) \mathrm { i }$
Where:
$\begin{aligned}\mathrm { K } & = \text { weighted averaga cost of capital } \\\mathrm { K } _ { 1 } & = \text { cost of equity capital for a levered firm } \\\mathrm { i } & = \text { before-tax cost of debt capital } \\\mathrm { t } & = \text { corporate income tax rate } \\\mathrm { L } & = \text { debt-to-total-market-value ratio }\end{aligned}$
D) weighing the after-tax borrowing cost of the firm and the pre-tax cost of equity capital, using the capital structure ratio as the weight.