Suppose that Rearden Metal currently has no debt and has an equity cost of capital of 12%.Rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock.Assume perfect capital markets.If Rearden borrows until they achieved a debt-to-equity ratio of 50%,then Rearden's levered cost of equity would be closest to:
A)10.0%.
B)12.0%.
C)15.0%.
D)16.0%.

Question

Quizplus · Accepted Answer

In perfect capital markets, the levered cost of equity can be calculated using the formula: Levered Cost of Equity = Unlevered Cost of Equity + (Unlevered Cost of Equity - Cost of Debt) * (Debt/Equity). Substituting the given values: 12% + (12% - 6%) * 0.5 = 15%.

Suppose That Rearden Metal Currently Has No Debt and Has