The cost of capital for a firm, rWACC, in a zero tax environment is:
A)equal to the expected earnings divided by market value of the unlevered firm.
B)equal to the rate of return for that business risk class.
C)equal to the overall rate of return required on the levered firm.
D)is constant regardless of the amount of leverage.
E)All of the above.

Question

Quizplus · Accepted Answer

In a zero tax environment, the cost of capital (rWACC) is not affected by leverage and is equal to the rate of return required for the business risk class, which is the same as the expected earnings divided by the market value of the unlevered firm. Thus, all options are correct.

The Cost of Capital for a Firm, RWACC, in a Zero