Until now, Delaware East, Inc has been an all-equity firm; its most recent market equity value was $80 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. 23.00%
FORMULA: rE = rA + (D/E)[rA - rD].
D
Business
You might also like to view...
Which one of the following types of securities has the lowest priority in a bankruptcy proceeding?
A. Convertible bond B. Senior debt C. Common stock D. Preferred stock E. Straight bond
Business
High capitalizations stocks that regularly pay dividends are known as blue chips
Indicate whether the statement is true or false
Business