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A firm has a market value of equity of $50,000. It borrows $12,500 at 8%. If...

A firm has a market value of equity of $50,000. It borrows $12,500 at 8%. If the unlevered cost of equity is 18%, what is the firm's cost of equity capital? Assume there are no corporate income taxes

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Answer #1

Levered Firm's Cost of equity capital = 18% + (18%-8%) X ($12,500/ $37,500)

= 21.33%

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