A firm has a debt-to-equity ratio of 0.50.Its cost of debt is 10%.Its overall cost of capital is 14%.What is its cost of equity if there are no taxes?
A)13%
B)16%
C)15%
D)18%

Question

Quizplus · Accepted Answer

To calculate the cost of equity using the information given, we can use the following formula:

Cost of equity = Overall cost of capital - (Debt-to-equity ratio x (Overall cost of capital - Cost of debt))

Cost of equity = 14% - (0.5 x (14% - 10%)) = 16%

Therefore, the answer is B - 16%.

A Firm Has a Debt-To-Equity Ratio of 0