Question 13 ABC Stores has a pre-tax cost of debt of 9 percent and a return on a

Question

Question 13

ABC Stores has a pre-tax cost of debt of 9 percent and a return on assets (unlevered cost of equity) of 14 percent. The debt-equity ratio is 0.75. What is the cost of equity? Assume no taxes.

Question 14

ABC has a debt-equity ratio of 1.8. The firm’s weighted average cost of capital is 15% and its pre-tax cost of debt is 8.6%. Assume no taxes. What is ABC’s cost of equity capital (Rs)?

Question 15

ABC has an unlevered cost of capital (Ra) of 15.8%, a cost of debt of 8.7%and a tax rate of 0%. What is the target debt-equity ratio if the targeted cost of equity (Rs) is 20.8%?

Enter you answer in percentages rounded off to two decimal points.

Explanation / Answer

13)

Equity (levered) = Equity unlevered+(D/E)×(Ru-Rd)

= 14%+0.75×(14%-9%)

= 14%+3.75%

= 17.75%

Hence, correct option is 17.75 percent.

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