To calculate the cost of equity, we need to use the Modigliani-Miller theorem, which states that the cost of equity is equal to the unlevered cost of equity plus the debt-equity ratio times the difference between the unlevered cost of equity and the after-tax cost of debt.

Here are the steps:

1. Calculate the after-tax cost of debt:
Cost of debt after tax = Pretax cost of debt * (1 - Tax rate)
= 8% * (1 - 0.21)
= 6.32%

2. Calculate the difference between the unlevered cost of equity and the after-tax cost of debt:
Difference = Unlevered cost of equity - After-tax cost of debt
= 11% - 6.32%
= 4.68%

3. Multiply the difference by the debt-equity ratio:
Product = Debt-equity ratio * Difference
= 0.4 * 4.68%
= 1.872%

4. Add the product to the unlevered cost of equity to get the levered cost of equity:
Levered cost of equity = Unlevered cost of equity + Product
= 11% + 1.872%
= 12.872%

So, the closest answer to King's cost of equity is 12.59%.

Question

To calculate the cost of equity, we need to use the Modigliani-Miller theorem, which states that the cost of equity is equal to the unlevered cost of equity plus the debt-equity ratio times the difference between the unlevered cost of equity and the after-tax cost of debt.

Here are the steps:

1. Calculate the after-tax cost of debt: 
   Cost of debt after tax = Pretax cost of debt * (1 - Tax rate)
   = 8% * (1 - 0.21) 
   = 6.32%

2. Calculate the difference between the unlevered cost of equity and the after-tax cost of debt: 
   Difference = Unlevered cost of equity - After-tax cost of debt 
   = 11% - 6.32% 
   = 4.68%

3. Multiply the difference by the debt-equity ratio: 
   Product = Debt-equity ratio * Difference 
   = 0.4 * 4.68% 
   = 1.872%

4. Add the product to the unlevered cost of equity to get the levered cost of equity: 
   Levered cost of equity = Unlevered cost of equity + Product 
   = 11% + 1.872% 
   = 12.872%

So, the closest answer to King's cost of equity is 12.59%.

Knowee AI · Accepted Answer

To calculate the cost of equity, we need to use the Modigliani-Miller theorem, which states that the cost of equity is equal to the unlevered cost of equity plus the debt-equity ratio times the difference between the unlevered cost of equity and the after-tax cost of debt.

Here are the steps:

1. Calculate the after-tax cost of debt: 
   Cost of debt after tax = Pretax cost of debt * (1 - Tax rate)
   = 8% * (1 - 0.21) 
   = 6.32%

2. Calculate the difference between the unlevered cost of equity and the after-tax cost of debt: 
   Difference = Unlevered cost of equity - After-tax cost of debt 
   = 11% - 6.32% 
   = 4.68%

3. Multiply the difference by the debt-equity ratio: 
   Product = Debt-equity ratio * Difference 
   = 0.4 * 4.68% 
   = 1.872%

4. Add the product to the unlevered cost of equity to get the levered cost of equity: 
   Levered cost of equity = Unlevered cost of equity + Product 
   = 11% + 1.872% 
   = 12.872%

So, the closest answer to King's cost of equity is 12.59%.

King's unlevered cost of equity is 11 percent and its pretax cost of debt is 8 percent. The firm has a debt-equity ratio of 0.4. If the tax rate is 21 percent, what is King's cost of equity?Multiple choice question.11.95%11%12.59%10.59%

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