A firm has a market value of equity of $30,000. It borrows $7500 at 8%. If the unlevered cost of equity is 15%, what is the firm's cost of equity capital?
A) 16.75%
B) 6.70%
C) 20.10%
D) 23.45%

Question

Quizplus · Accepted Answer

A) Use MM Proposition II equation, r_E = r_U + 11ea84dc_f508_616f_9a63_93238b5c5848_TB1316_11_TB1316_11 ( r_U - r_D ) The firm's cost of equity capital = 15% + ($7500 / $30,000)(15% - 8%) = 16.75%

A Firm Has a Market Value of Equity of $30,000