An unlevered firm has expected earnings of $37,584 and a market value of equity of $324,000.The firm is planning to issue $65,000 of debt at 6.6 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?
A)12.85%
B)13.58%
C)13.40%
D)12.04%
E)12.48%

Question

Quizplus · Accepted Answer

R₀ = $37,584 / $324,000 = 0.116 R_s = 0.116 + [$65,000 / ($324,000 - $65,000)](0.116 - 0.066)= 0.1285,or 12.85%

An Unlevered Firm Has Expected Earnings of $37,584 and a Market