Tardy Clocks Inc.(TC)has long term bonds with a face value of $6M,the coupon rate on the bonds is 6% and the yield on the bonds is also 6%.The unlevered cost of equity is 10% and the value of TC's equity is $9.1M.The corporate tax rate is 35%.What is the required return of shareholders at Tardy?
A) 6.00%
B) 10.00%
C) 10.92%
D) 11.71%
E) 12.57%

Question

Quizplus · Accepted Answer

This solution uses Modigliani & Miller Proposition II with taxes: k_E = k_U + (k_U - k_D) × (1 - T) 11ea7fdb_fc67_60ce_a768_21c3c7613725_TB2902_11 k_E = 0.10 + (0.10 - 0.06) × (1 - 0.35) × 11ea7fdb_fc67_60cf_a768_93282f7db99b_TB2902_11 = 0.1171 or 11.71%