The unlevered cost of capital for Red Ryder, Inc. is 12%. Pretax debt costs are 8%. Assuming a debt equity ratio of 0.33, what is the cost of equity? The tax rate is 34%.

Question

Quizplus · Accepted Answer

The correct answer is C.The cost of equity can be calculated using the following formula:Cost of equity = Unlevered cost of capital + (Unlevered cost of capital - Pretax debt cost) * (Debt equity ratio) * (1 - Tax rate)Plugging in the given values, we get:Cost of equity = 12% + (12% - 8%) * (0.33) * (1 - 0.34) = 12.9%

The Unlevered Cost of Capital for Red Ryder, Inc