What is the cost of equity for a firm if the corporate tax rate is 40%? The firm has a debt-to-equity ratio of 1.5.If it had no debt,its cost of equity would be 14%.Its current cost of debt is 10%.
A)17.6%
B)18.4%
C)19.6%
D)21.4%
E)None of the above.

Question

Quizplus · Accepted Answer

The correct answer is A because the cost of equity for a firm with a debt-to-equity ratio of 1.5 and a corporate tax rate of 40% is 17.6%. This is calculated as follows:Cost of equity = Cost of equity without debt * (1 + (Debt-to-equity ratio * (Cost of debt * (1 - Tax rate))))Cost of equity = 14% * (1 + (1.5 * (10% * (1 - 40%))))Cost of equity = 14% * (1 + (1.5 * (10% * 0.6)))Cost of equity = 14% * (1 + (1.5 * 6%))Cost of equity = 14% * (1 + 9%)Cost of equity = 14% * 1.09Cost of equity = 17.6%

What Is the Cost of Equity for a Firm If