Bellamee, Inc. has a required rate of return on its assets of 12% and a cost of debt of 6.25%. Its current debt-to-equity ratio is 1/5. What is the required rate of return on its equity?
A) 12.15%
B) 13.15%
C) 14.15%
D) None of the above.

Question

Quizplus · Accepted Answer

To find the required rate of return on equity, we need to use the following formula:

Required Rate of Return on Equity = Required Rate of Return on Assets - (Debt/Equity) x (Required Rate of Return on Assets - Cost of Debt)

Plugging in the given values:

Required Rate of Return on Equity = 12% - (1/5) x (12% - 6.25%)

Required Rate of Return on Equity = 13.15%

Therefore, the correct answer is B) 13.15%.