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An All-Equity Firm Has a Return on Assets of 17

Question 5

Multiple Choice

An all-equity firm has a return on assets of 17.5 percent.The firm is considering converting to a debt-equity ratio of .40.The pretax cost of debt is 7.5 percent.Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital structure?


A) 21.95 percent
B) 21.22 percent
C) 22.54 percent
D) 22.97 percent
E) 21.50 percent

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