The Tip-Top Paving Co. has a beta of 1.11, a cost of debt of 11% and a debt to value ratio of .6. The current risk free rate is 9% and the market rate of return is 16.18%. What is the company's cost of equity capital?

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Quizplus · Accepted Answer

The correct answer is A because the cost of equity capital is 16.97%. The formula for the cost of equity capital is: Cost of equity capital = Risk-free rate + Beta * (Market rate of return - Risk-free rate) * (1 - Debt to value ratio) * Cost of debt. Plugging in the given values, we get: Cost of equity capital = 9% + 1.11 * (16.18% - 9%) * (1 - 0.6) * 11% = 16.97%.