Until now, Delaware East, Inc has been an all-equity firm; its most recent market equity value was $100 mn., and its cost of equity (and cost of assets) is 15%. Now, the firm decides to increase its leverage by issuing $40 mn
in debt, with the proceeds being used to pay a dividend to shareholders. The cost of the debt is rD=7%. What is the firm's new cost of equity capital, according to Modigliani and Miller's Proposition II?
a. 15.33%
b. 18.20%
c 20.33%
d. 22.50%
FORMULA: rE = rA + (D/E)[rA - rD].
C
You might also like to view...
What are the primary activities in the value chain?
What will be an ideal response?
Which of the following best explains why e-mail is a poor choice for communicating sensitive messages?
A) E-mail is too fast for accommodating emotional messages. Once a message is sent, there is no "taking back" what has been said. B) Nonverbal communication is not possible with e-mail. So, for example, it is difficult to reassure a person that things will be "all right" in the wake of bad news. C) E-mail is too slow for accommodating emotional messages. Once a message is sent you might need to wait a long time for a response, and by that time your feelings have changed. D) E-mail is too permanent for accommodating emotional messages. People don't want to have a written record of what they said when it includes emotional content.