Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your required return on assets is 15%. What is your cost of equity if you ignore taxes?
A) 11.25%
B) 12.21%
C) 16.67%
D) 19.88%
E) 21.38%

Question

Quizplus · Accepted Answer

The cost of equity can be calculated using the formula: Cost of Equity = Required Return on Assets + (Required Return on Assets - Cost of Debt) * Debt-Equity Ratio. Substituting the given values: Cost of Equity = 15% + (15% - 8.5%) * 0.75 = 19.88%.

Your Firm Has a Debt-Equity Ratio of