A firm requires an investment of $30,000 and borrows $10,000 at 6%.If the tax rate is 30%,and the firm's WACC is 11.4%,what is the firm's cost of equity?
A)15%
B)14.1%
C)5.4%
D)17.4%
E)15.6%

Question

Quizplus · Accepted Answer

The correct answer is A because the cost of equity is 15%. The WACC is calculated as the weighted average of the cost of debt and the cost of equity. The cost of debt is 6% and the weight of debt is 10,000/40,000 = 25%. The cost of equity is 11.4% - 6% * 25% = 15%.

A Firm Requires an Investment of $30,000 and Borrows $10,000