An unlevered firm has expected earnings of $33,062.50 and a market value of equity of $287,500.The firm is planning to issue $50,000 of debt at 7 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?
A)12.45%
B)13.58%
C)13.85%
D)12.04%
E)12.73%

Question

Quizplus · Accepted Answer

R₀ = $33,062.50/$287,500 = .115R_s = .115 + [$50,000/($287,500 - 50,000)] (.115 - .07)= .1245,or 12.45%

An Unlevered Firm Has Expected Earnings of $33,062