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Tanya [424]
3 years ago
15

A firm has a market value of equity of $50,000. It borrows $12,500 at 7%. If the unlevered cost of equity is 18%, what is the fi

rm's cost of equity capital
Business
1 answer:
Mariulka [41]3 years ago
8 0

Answer: 21.63%

Explanation:

The firm's cost of equity capital will be calculated thus:

Market value of assets = $50000

Debt = $12500

Cost of debt = 7%

Unlevered cost of equity = 18%

Then, we'll calculate equity which will be calculated as:

= Market value of assets - Debt

= $50000 - $12500

= $37500

Then, the cost of equity capital will be:

= Unlevered cost of equity + [(Debt/equity) x (Unlevered cost of equity - Cost of debt)]

= 18% + [($12500/$37500) x (18% - 7%)]

= 18% + [0.33 x 11%]

= 18% + 3.63%

= 21.63%

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