M&M Proposition 2: Bellamee Ltd has a required rate of return on its assets of 12% and a cost of debt of 6.25%. Their current debt-to-equity ratio is 1/5. What is its required return on equity if its debt-to-equity ratio changes to 2/5 and this increases the required rate of return on their debt to 7%?
A) 14%
B) 14.25%
C) 14.50%
D) 15%

Question

Quizplus · Accepted Answer

The correct answer is A because the required return on equity increases when the debt-to-equity ratio increases and the cost of debt increases.

M&M Proposition 2: Bellamee Ltd Has a Required Rate of Return