Question

The business risk of a companv: has a positive relationship with the company's cost of equity O is inversely related to the required return on the company's assets. O is dependent upon the relative weights of the debt and equity used to finance the company. O has no relationship with the required return on a company's assets according to M&M theory. O depends on the company's level of unsystematic risk.

Answer 1

Debt-Equity Ratio	Debt / Equity
Debt	0.68 * Equity
Let Equity	x
Debt	0.68x
Total	$1.68x
WACC	Respective Costs * Respective Weights
10.82	(x/1.68x*Cost of equity)+(0.68x/1.68x*7.4)
10.82	(Cost of equity/1.68)+2.995238095
Cost of Equity	(10.82-2.995238095)*1.68
Cost of Equity	13.15%

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