Answer:
b) 32%
Explanation:
Formula for calculating cost of equity is given as ;
r levered = r levered + ( debt / equity × ( r unlevered - cost of debt) × ( 1 - tax)
r unlevered is the cost of an unlevered equity = 16.0%
Debt = $500,000
Cost of debt = 12%
Equity = unknown
Firstly, we need to calculate the value of the firm and the formula is denoted by;
EBIT ( 1 - tax ) / Unlevered cost of equity + ( debt × tax )
= $100,000 ( 1 - 30% ) / 16% + ( $500,000 × 30% )
= $100,000 ( 0.7 ) /0.16 + $30,000
= $437,500 + $150,000
= $587,500
r levered = 16% + ( $500,000 / ( $587,500 - $500,000 ) × ( 16% - 12% ) × ( 1 - 30%)
= 0.16 + ( $500,000 / 87,500 ) × 0.04 × ( 0.7 )
= 0.16 + 5.71 × 0.04 × 0.7
= 32%
