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lana66690 [7]
3 years ago
11

A firm has a debt-to-equity ratio of 1.0. If it had no debt, its cost of equity would be 12 percent. Its cost of debt is 9 perce

nt. What is its cost of equity if there are no taxes?
Business
1 answer:
Tpy6a [65]3 years ago
6 0

Answer:

15%

Explanation:

The computation of the cost of equity in case of no taxes is shown below:

Cost of equity without tax  = Cost of equity + (cost of equity - cost of debt) × debt equity ratio

where,

Cost of equity = 12%

Cost fo debt = 9%

And, the debt equity ratio = 1

Now placing these values to the above formula,

So, the cost of equity without considering the tax is

= 0.12 + (0.12 - 0.09) × 1

= 0.12 + 0.03 × 1

= 0.12 + 0.03

= 0.15

= 15%

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