All-equity firm with cost of capital
Course:- Risk Management
Reference No.:- EM131350935

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Lestrade Industries, Inc. is an all-equity firm with a cost of capital of 9%. The firm is considering a new capital structure with 40% debt. The interest rate on the debt will be 4%. According to the MM Proposition II with taxes, what will be Lestrade’s cost of equity after the recapitalization? Assume the corporate tax rate of 34%.

A) 10.3% B) 11.0% C) 11.2% D) 13.9% E) None of the above.

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