Wild Flowers Express has a debt-equity ratio of .60.The pretax cost of debt is 9 percent while the unlevered cost of capital is 14 percent.What is the cost of equity if the tax rate is 23 percent?
A)7.52 percent
B)8.78 percent
C)16.31 percent
D)16.83 percent
E)17.30 percent

Question

Quizplus · Accepted Answer

First, we need to calculate the debt and equity proportions in the capital structure:
Equity = 1 - Debt/Equity Ratio = 1 - 0.60 = 0.40
Debt = 0.60

Next, we can calculate the weighted average cost of capital (WACC) using the formula:
WACC = (Equity Proportion * Cost of Equity) + (Debt Proportion * Cost of Debt * (1 - Tax Rate))

Plugging in the given values, we get:
WACC = (0.40 * Cost of Equity) + (0.60 * 9% * (1 - 0.23))
14% = (0.40 * Cost of Equity) + (0.3912)

Solving for Cost of Equity, we get:
Cost of Equity = (14% - 0.3912) / 0.40 = 16.31%

Therefore, the answer is C) 16.31 percent.

Wild Flowers Express Has a Debt-Equity Ratio of