The Pizza Shoppe has debt with both a face and market value of $24,000 and a coupon rate of 6.4 percent.The expected earnings before interest and taxes are $21,400,the tax rate is 35 percent,and the unlevered cost of capital is 11.4 percent.What is the firm's cost of equity?
A)13.25%
B)12.89%
C)13.92%
D)12.13%
E)14.25%

Question

Quizplus · Accepted Answer

V_U = [$21,400 × (1 - 0.35)] / 0.114 = $122,017.54 V_L = $122,017.54 + (0.35 × $24,000)= $130,417.54 V_S = $130,417.54 - 24,000 = $106,417.54 R_S = 0.114 + ($24,000 / $106,417.54)(1 - 0.35)(0.114 - 0.064)= 0.1213 or 12.13%

The Pizza Shoppe Has Debt with Both a Face and Market