A firm has a market value of equity of $30,000. It borrows $7500 at 8%. If the unlevered cost of equity is 16%, what is the firm's cost of equity capital?
A) 9.0%
B) 18.0%
C) 21.6%
D) 25.2%

Question

Quizplus · Accepted Answer

B) Use MM Proposition II equation, r_E = r_U + 11ea84dc_f508_8880_9a63_f33d5b3200ac_TB1316_11_TB1316_11 ( r_U - r_D ) The firm's cost of equity capital = 16% + ($7500 / $30,000)(16% - 8%) = 18.0%

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