A firm's return on assets is 12 percent and the cost of the firm's debt is 7 percent. Given a 0.7 debt-equity-ratio, what is the levered cost of equity? Assume that there are no taxes.
A)7.0 percent
B)12.0 percent
C)13.6 percent
D)15.5 percent

Question

Quizplus · Accepted Answer

The levered cost of equity can be calculated using the formula: Cost of Equity = Return on Assets + (Return on Assets - Cost of Debt) * Debt/Equity Ratio. Substituting the given values: Cost of Equity = 12% + (12% - 7%) * 0.7 = 15.5%.

A Firm's Return on Assets Is 12 Percent and the Cost