A firm has a market value of equity of $40,000. It borrows $8000 at 7%. If the unlevered cost of equity is 16%, what is the firm's cost of equity capital?
A) 8.9%
B) 21.4%
C) 17.8%
D) 24.9%

Question

Quizplus · Accepted Answer

C) Use MM Proposition II equation, r_E = r_U + 11ea84dc_f508_af91_9a63_7f0b04611d76_TB1316_11_TB1316_11 ( r_U - r_D ) The firm's cost of equity capital = 16% + ($8000 / $40,000)(16% - 7%) = 17.8%

A Firm Has a Market Value of Equity of $40,000