A ﬁrm has a debt-equity ratio of .40, a WACC of 16%, and a yield-to-maturity on its debt of 13%. Ignoring taxes, what is the cost of equity?
A) 7.8%
B) 9.6%
C) 11.8%
D) 15.2%
E) 17.2%

Question

Quizplus · Accepted Answer

The WACC formula without taxes is: WACC = (E/V) * Re + (D/V) * Rd. Given D/E = 0.40, we have D/V = 0.40/1.40 and E/V = 1/1.40. Plugging in WACC = 16% and Rd = 13%, solve for Re to find it is 17.2%.

A ﬁRm Has a Debt-Equity Ratio of