BK Inc. has a cost of debt of 10% and a WACC of 15%. The debt-equity ratio is.6. The tax rate is 35%. What is the cost of equity?
A) 19.33%
B) 19.88%
C) 20.10%
D) 20.54%
E) 20.67%

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the formula for WACC: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc). Solving for Re, we get Re = WACC - (D/V) * Rd * (1-Tc). Given WACC = 15%, Rd = 10%, Tc = 35%, and D/E = 0.6, we find D/V = 0.6/(1+0.6) = 0.375 and E/V = 1 - D/V = 0.625. Plugging these values into the formula gives Re = 15% - 0.375 * 10% * (1-0.35) = 20.10%.

BK Inc Has a Cost of Debt of 10% and a a WACC