Assume an M&M world with taxes where the corporate tax rate is 25%,the before tax required return on debt is 8%,the required return on the unlevered firm is 12%,and the firm is financed 20% with debt and 80% with equity.What is the required return on equity?

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Quizplus · Accepted Answer

The correct answer is A because the required return on equity is 12.75%. This can be calculated using the following formula:Required return on equity = Required return on unlevered firm + (Required return on unlevered firm - Required return on debt) * (Debt-to-equity ratio)= 12% + (12% - 8%) * (20% / 80%)= 12% + 4% * 0.25= 12% + 1%= 12.75%

Assume an M&M World with Taxes Where the Corporate Tax