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An all-equity firm has a return on assets of 15.3 percent. The firm is considering converting to a debt-equity ratio of 0.30. The pre-tax cost of debt is 8.1 percent. Ignoring taxes, what will the cost of equity be if the firm switches to the leveraged capital structure

Answer :

TomShelby

Answer:

re 17.4600%

Explanation:

We will calculate using the Modigliani Miller proposition with no taxes to solve for the cost of equity of a levered firm

[tex]r_e = r_u + (r_r - r_b) \frac{B}{S}\\where:\\r_e= $cost of equity\\r_b= $cost of debt\\r_u= $return on assets\\B/S = Debt to Equity[/tex]

We plus our values into the formula and solve

[tex]r_e = 0.153+ (0.153 - 0.081)0.3[/tex]

re 17.4600%

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