Your firm has a debt-equity ratio of .75. Your pre-tax cost of debt is 8.5% and your required return on assets is 15%. What is your cost of equity if you ignore taxes? (Use MM Prop II, No Tax). A. 11.25%
B. 12.21%
C. 16.67%
D. 19.88%
E. 21.38%

D. 19.88%

Explanation:

The computation of the cost of equity is shown below:

Cost of equity = Return on assets + Debt equity ratio × (Return on assets -pre tax cost of debt)

= 0.15 + 0.75 × (0.15  - 0.085)

= 0.19875 or 19.88%

Hence, the correct option is D. 19.88%

We simply applied the above formula so that the correct value could come

And, the same is to be considered  

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