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What Is the Maximum Rate That Can Be Paid on Debt

Question 39

Multiple Choice

What is the maximum rate that can be paid on debt and maintain a 14% WACC with a 19% expected return on equity in a firm with a 60% debt-to-asset ratio? Ignore taxes.


A) 6.50%
B) 9.90%
C) 10.67%
D) 11.14% WACC = rdebt + requity
14% = rdebt(.60) + 19%(.40)
14% = .6rdebt + 7.6%

Correct Answer:

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