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a firm has a market value of equity of 30,000. it borrows 7500 at 8%. if the unlevered cost of equity is 16%, what is the firms cost of equity capital

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Tundexi

Answer:

18%

Explanation:

Ke = Kul +[Kul+Kd] [D/E]

Unlevered cost of Equity(Kul)= 16%, Cost of Debt(kd) = 8%, Debt = $7500 & Equity = $30,000

ke= 0.16+(0.16-0.08)(7,500/30,000)

ke= 0.16+(0.08)(0.25)

ke= 0.16 + 0.02

ke= 0.18

Ke = 18%

Thus, the firms cost of equity capital is 18%

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