Lamey Co. has an unlevered cost of capital of 12.3 percent, a total tax rate of 25 percent, and expected earnings before interest and taxes of $32,840. The company has $60,000 in bonds outstanding that sell at par and have a coupon rate of 7.2 percent. What is the cost of equity?

Question

Quizplus · Accepted Answer

The correct answer is A because the cost of equity is 13.78 percent. This can be calculated using the following formula:Cost of equity = Unlevered cost of capital + (Unlevered cost of capital - Bond yield) * (Debt / Equity) * (1 - Tax rate)Plugging in the given values, we get:Cost of equity = 12.3% + (12.3% - 7.2%) * (60,000 / 40,000) * (1 - 25%)= 12.3% + 3.075%= 13.78%

Lamey Co Has an Unlevered Cost of Capital of 12