Question: We consider 2 companies A and B whose economic activity is identical, but they differ in their financial structure. Their is equal to 1.2.

We consider 2 companies A and B whose economic activity is identical, but they differ in their financial structure. Their β is equal to 1.2. The risk-free rate is 7% and the average market rate of return is 15%. The marginal tax rate is 20%. Firm A has not in debt and firm B has a debt equity mix of 30%.

What is the cost of equity of company B?

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