A firm has zero debt and an overall cost of capital of 11.7 percent. The firm is

Question

A firm has zero debt and an overall cost of capital of 11.7 percent. The firm is considering a new capital structure with 45 percent debt at an interest rate of 6.8 percent. Assume there are no new taxes or other imperfections. What will be the levered cost of equity?
A. 14.67% B. 16.16% C. 16.47% D. 15.80% E. 15.71% A firm has zero debt and an overall cost of capital of 11.7 percent. The firm is considering a new capital structure with 45 percent debt at an interest rate of 6.8 percent. Assume there are no new taxes or other imperfections. What will be the levered cost of equity?
A. 14.67% B. 16.16% C. 16.47% D. 15.80% E. 15.71%
A. 14.67% B. 16.16% C. 16.47% D. 15.80% E. 15.71%

Explanation / Answer

OLD MODEL Kd= 0.00% Ko= Kd+Ke 11.70% Ke =Ko-Kd 11.70% NEW MODEL (GIVEN) weightage (w) COST Kd 45.00% 6.80% Ke 55.00% ? Ko= Kd+Ke 11.70% COMPUTING Ke = weighted average cost of capital Ko= Kd*w1+Ke*w2 11.7%= 6.8*45%+Ke*55% 11.7% - 3.06% =55%Ke 8.64%= 55%Ke 8.64% / 55% = Ke Ke = 15.71%

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