An all-equity firm has a return on assets of 15.3 percent.The firm is considering converting to a debt-equity ratio of 0.40.The pretax cost of debt is 8.1 percent.Ignoring taxes,what will the cost of equity be if the firm switches to the levered capital structure?
A)15.30 percent
B)16.28 percent
C)16.67 percent
D)17.46 percent
E)18.18 percent

Question

Quizplus · Accepted Answer

R_E = 0.153 + [(0.153 - 0.081) × 0.40] = 18.18 percent

An All-Equity Firm Has a Return on Assets of 15