Final answer:
The cost of capital for an all-equity firm is found by dividing the expected earnings by the equity. For a firm with expected earnings of $1,900 and equity of $12,500, the cost of capital is 15.2%, thus the correct answer is B) 15.2%.
Step-by-step explanation:
The cost of capital for an all-equity firm is calculated as the expected return that the market requires, which can be understood as the earnings divided by the equity of the firm. This represents the return that investors expect from their investment in the firm. In this case, the expected earnings are $1,900 and the equity is $12,500.
To calculate the cost of capital, also known as the required rate of return, we use the following formula:
Cost of Capital = Expected Earnings / Equity
Plugging in the numbers we have:
Cost of Capital = $1,900 / $12,500
Upon performing the calculation, the cost of capital comes out to 0.152 or 15.2%. Therefore, the correct answer is B) 15.2%.