Question

Question 9 Not complete Marked out of 1.00 p Flag question Brick Aviation Inc. has no debt but can borrow at 8% if it needs to. The shareholders require a return of 15%. The tax rate is 35%. If the company borrows such that its debt-to-value (D/V) ratio is 25%, then will its cost of equity be? Select one: o 15.9% O 16.5% 16.1% 16.3%

Answer 1

Solution: calculation of return on levered equity rS=r0+(B/S)(ro-rB)(1-TC) 0.15 0.25/0.75)*(0.15-0.08) *(1-0.35) 16.5% ro= the required return on the equity of an unlevered firm rs = the required return on the equity of a levered firm rB=the pre-tax cost of debt TC= the corporate tax rate B/S = the firm's debt-to-equity ratio