An unlevered firm has a cost of capital of 11.3 percent and a tax rate of 34 percent.The firm is considering a new capital structure with 60 percent debt.The interest rate on the debt would be 7.25 percent.What would be the firm's levered cost of capital if it adopts the new capital structure?
A)15.31%
B)14.78%
C)12.90%
D)12.30%
E)17.38%

Question

Quizplus · Accepted Answer

R_S = .113 + .60/.40(1 - .34)(.113 -.0725)= .1531,or 15.31%

An Unlevered Firm Has a Cost of Capital of 11