Question

If a firm is unlevered and has a cost of equity capital 9%, what would the cost of equity be if the firms became levered at a debt-equity ratio of 1.8? The expected cost of debt is 7%. (Assume no taxes

Answer 1

Answer:

12.6

Explanation:

The cost of equity capital is 9%

Debt equity ratio is 1.8

The expected cost of debt is 7%

Therefore the cost of equity can be calculated as follows

= 9 + 1.8(9-7)

=9 + 1.8(2)

=9 + 3.6

= 12.6

Hence the cost of equity is 12.6