The required return on equity for a levered firm is 10.60%. The debt to equity ratio is ½ the tax rate is 40%, the pre-tax cost of debt is 8%. Find the cost of capital if this firm were financed entirely with equity.

Question

Quizplus · Accepted Answer

The cost of capital for an all-equity firm is the required return on equity, which is 10.60%. However, the given choices do not match this exactly, but choice A (10%) is the closest approximation.

The Required Return on Equity for a Levered Firm Is