A firm requires an investment of $20,000.The firm's debt cost of capital is 5%,and its return on equity is 12%.If the firm's pre-tax WACC is 7.8%,how much equity did the firm use for its investment?

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The correct answer is A.The WACC formula is:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)where:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = corporate tax rateWe are given that:WACC = 7.8%Rd = 5%Re = 12%We can solve for E/V:E/V = WACC / (Re - Rd * (1 - Tc))E/V = 7.8% / (12% - 5% * (1 - 0))E/V = 0.4Therefore, the firm used 40% equity for its investment.E = 0.4 * $20,000 = $8,000

A Firm Requires an Investment of $20,000