Tip-Top Paving wants to be levered at a debt to value ratio of .6.The cost of debt is 11%,the tax rate is 34%,and the cost of equity for an all equity firm is 14%.What will be Tip-Top's cost of equity?

Question

Quizplus · Accepted Answer

We can use the following formula to find the cost of equity for a levered firm:

Cost of Equity = Cost of Unlevered Equity + (Cost of Debt - Tax Rate) * (Debt/Value)

First, we need to find the cost of unlevered equity, which is the cost of equity for an all equity firm. This is given as 14%.

Next, we can plug in the values:

Cost of Equity = 14% + (11% - 34%) * (0.6/(1-0.6))
Cost of Equity = 16.97%

Therefore, the answer is D) 16.97%.

Tip-Top Paving Wants to Be Levered at a Debt to Value