Rogot Inc. has $100 million in debt, and equity valued at $ 2 per share valued at $200 million. Total firm value is thus $300 million.

The firm pays corporate income tax at a rate of 35%. Its cost of equity is 12% and its cost of debt is 7%.

c. The management team at Rogot decides to increase the firm’s debt/equity ratio to 1.0/1.0. This action will boost the cost of debt to 8%. What will be the new expected cost of equity?

Answer rating: 100% (QA)

1 The first step is to find the unlevered cost of equity rsL rsU rsUrd1TDE where rsL Cost of ... View the full answer