143k views
2 votes
Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your required return on assets is 15%. What is your cost of equity if you ignore taxes? (Use MM Prop II, No Tax).

A. 11.25%
B. 12.21%
C. 16.67%
D. 19.88%
E. 21.38%

User Aseolin
by
9.2k points

1 Answer

3 votes

Answer:

D. 19.88%

Step-by-step explanation:

The computation of the cost of equity is shown below:

Cost of equity = Return on assets + Debt equity ratio × (Return on assets -pre tax cost of debt)

= 0.15 + 0.75 × (0.15 - 0.085)

= 0.19875 or 19.88%

Hence, the correct option is D. 19.88%

We simply applied the above formula so that the correct value could come

And, the same is to be considered

User Zaq
by
8.1k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.