MC Qu. 73 Lamey Co. has an unlevered cost... Lamey Co. has an unlevered cost of
ID: 2768349 • Letter: M
Question
MC Qu. 73 Lamey Co. has an unlevered cost...
Lamey Co. has an unlevered cost of capital of 10.9 percent, a tax rate of 35 percent, and expected earnings before interest and taxes of $21,800. The company has $25,000 in bonds outstanding that sell at par and have a coupon rate of 6 percent. What is the cost of equity?
Which of the following is the correct answer:
References
Lamey Co. has an unlevered cost of capital of 10.9 percent, a tax rate of 35 percent, and expected earnings before interest and taxes of $21,800. The company has $25,000 in bonds outstanding that sell at par and have a coupon rate of 6 percent. What is the cost of equity?
Which of the following is the correct answer:
Explanation / Answer
Answer: 11.60%
Vu = [ 21800 - (1 x .35)]/.109 = $130000
Vl = $130000 + (.35 x $25,000) = $138750
Ve = $138750 - $25,000 = $113750
Re = 0.109 + [(.109 - .06) x ($25,000/$113750) x (1 - .35)]
= 11.60 percent
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