A firm uses only debt and equity in its capital structure. The firm's weight of debt is 45 percent. The firm could issue new bonds at a yield to maturity of 10 percent and the firm has a tax rate of 30 percent. If the firm's WACC is 12 percent, what is the firm's cost of equity?
A)16.09 percent
B)15.63 percent
C)15.21 percent
D)14.57 percent

Question

Quizplus · Accepted Answer

The correct answer is A.The firm's cost of debt is 10% * (1 - 30%) = 7%. The firm's WACC is 12%, so the firm's cost of equity is 12% - 7% * 45% = 16.09%.

A Firm Uses Only Debt and Equity in Its Capital