A firm currently has a cost of equity (i.e., a required return on its equity) of 15%. It has no debt outstanding, but bankers have offered to lend to it at an interest rate of 6%, as long as it maintains a debt - to - value ratio no greater than .3. What would the firm's new cost of equity be if it borrows up to this amount of debt, converting to a debt-to- value ratio of .3 ? A. 8.57% B. 16.80% C. 17.57% D. 17.70% Ε. 18.86% Answer: E. 18.86%

A firm currently has a cost of equity (i.e., a required return on its equity) of 15%. It has no debt outstanding, but bankers have offered to lend to it at an interest rate of 6%, as long as it maintains a debt - to - value ratio no greater than .3. What would the firm's new cost of equity be if it borrows up to this amount of debt, converting to a debt-to- value ratio of .3 ? A. 8.57% B. 16.80% C. 17.57% D. 17.70% Ε. 18.86% Answer: E. 18.86%

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 5MC: What happens to ROE for Firm U and Firm L if EBIT falls to $1,600? What happens if EBIT falls to...

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