A firm has a debt-to-equity ratio of 1.Its levered cost of equity is 16%,and its cost of debt is 8%.If there were no taxes,what would be its cost of equity if the debt-to-equity ratio were zero?
A)8%
B)10%
C)12%
D)14%

Question

Quizplus · Accepted Answer

In a no-tax scenario, the cost of equity without leverage (unlevered cost of equity) can be calculated using the formula: Unlevered Cost of Equity = Levered Cost of Equity - (Debt/Equity) * (Levered Cost of Equity - Cost of Debt). With a debt-to-equity ratio of 1, the unlevered cost of equity is 16% - 1 * (16% - 8%) = 12%.

A Firm Has a Debt-To-Equity Ratio of 1