An unlevered firm has expected earnings of $2,401 and a market value of equity of $19,600.The firm is planning to issue $4,000 of debt at 6 percent interest and use the proceeds to repurchase shares at their current market value.Ignore taxes.What will be the cost of equity after the repurchase?
A)10.99%
B)11.08%
C)13.85%
D)13.97%
E)12.25%

Question

Quizplus · Accepted Answer

R₀ = $2,401/$19,600 = .1225R_s = .1225 + [$4,000/($19,600 - 4,000)] (.1225 - .06)= .1385,or 13.85%

An Unlevered Firm Has Expected Earnings of $2,401 and a Market