A firm has a debt-equity ratio of .64,a pretax cost of debt of 8.5 percent,and a required return on assets of 12.6 percent.What is the cost of equity if you ignore taxes?
A)8.06 percent
B)8.55 percent
C)11.12 percent
D)15.22 percent
E)16.38 percent

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the formula: $r_E = r_A + (r_A - r_D) \times (\frac{D}{E})$, where $r_E$ is the cost of equity, $r_A$ is the required return on assets, $r_D$ is the cost of debt, and $\frac{D}{E}$ is the debt-equity ratio. Plugging in the given values: $r_E = 12.6\% + (12.6\% - 8.5\%) \times 0.64 = 12.6\% + 4.1\% \times 0.64 = 12.6\% + 2.624\% = 15.224\%$. Rounding to two decimal places gives 15.22 percent.

A Firm Has a Debt-Equity Ratio of