What is its cost of equity if there are no taxes or other imperfections? The firm has a debt-to-equity ratio of.60. Its cost of debt is 8%. Its overall cost of capital is 12%.
A) 18%.
B) 14.4%.
C) 10%.
D) 13.5%.

Question

Quizplus · Accepted Answer

The correct answer is B. The cost of equity can be calculated using the weighted average cost of capital (WACC) formula:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)where:E = market value of equityV = total market value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = corporate tax rateSince there are no taxes or other imperfections, the WACC formula simplifies to:WACC = (E/V) * Re + (D/V) * RdWe are given that the debt-to-equity ratio is 0.60, which means that D/V = 0.60 and E/V = 0.40. We are also given that the cost of debt is 8% and the overall cost of capital is 12%. Substituting these values into the WACC formula, we get:0.12 = 0.40 * Re + 0.60 * 0.08Solving for Re, we get:Re = 0.144 or 14.4%Therefore, the cost of equity is 14.4%.

What Is Its Cost of Equity If There Are No