A firm has a market value of assets of $50,000.It borrows $10,000 at 5%.If the unlevered cost of equity is 15%,what is the firm's cost of equity capital?
A)17.5%
B)18.5%
C)19.2%
D)20.6%

Question

Quizplus · Accepted Answer

The correct answer is A because the firm's cost of equity capital is 17.5%. This is calculated by taking the unlevered cost of equity (15%) and adding the product of the debt-to-equity ratio (10,000/40,000 = 0.25) and the interest rate (5%).

A Firm Has a Market Value of Assets of $50,000