The Outlet has an unlevered cost of capital of 15.1 percent,a tax rate of 34 percent,and expected earnings before interest and taxes of $26,100.The company has $25,000 in bonds outstanding that have a coupon rate of 7.6 percent.The bonds are selling at par.What is the cost of equity?
A)14.31%
B)15.08%
C)16.59%
D)14.64%
E)16.37%

Question

Quizplus · Accepted Answer

V_U = [$26,100 × (1 - 0.34)] /0.151 = $114,079.47 V_L = $114,079.47 + (0.34 × $25,000)= $122,579.47 V_S = $122,579.47 - $25,000 = $97,579.47 R_s = 0.151 + ($25,000 / $97,579.47)(1 - 0.34)(0.151- 0.076)= 0.1637,or 16.37%

The Outlet Has an Unlevered Cost of Capital of 15