A firm's return on assets is estimated to be 12% and the cost of the firm's debt is 7%. Given a .7 debt to equity ratio, what is the levered cost of equity?
A) 7%
B) 12%
C) 13.6%
D) 15.5%

Question

Quizplus · Accepted Answer

The levered cost of equity can be calculated using the formula: Cost of Equity = Return on Assets + (Return on Assets - Cost of Debt) * (Debt/Equity). Substituting the given values: Cost of Equity = 12% + (12% - 7%) * 0.7 = 15.5%.

A Firm's Return on Assets Is Estimated to Be 12