Wild Flowers Express has a debt-equity ratio of .60. The pre-tax cost of debt is 9% while the unlevered cost of capital is 14%. What is the cost of equity if the tax rate is 34%?
A) 7.52%
B) 8.78%
C) 15.98%
D) 16.83%
E) 17.30%

Question

Quizplus · Accepted Answer

To find the cost of equity, we can use the formula:

Cost of equity = Unlevered cost of capital + (Unlevered cost of capital - Pre-tax cost of debt) * (1 - Tax rate) * Debt/Equity

Substituting the values, we get:

Cost of equity = 14% + (14% - 9%) * (1 - 0.34) * 0.60

Cost of equity = 15.98%

Therefore, the best choice is option C) 15.98% as it gives the correct cost of equity for Wild Flowers Express.

Wild Flowers Express Has a Debt-Equity Ratio of