The Market Value of XYZ Corporation's Common Stock Is $40

Multiple Choice

The market value of XYZ Corporation's common stock is $40 million and the market value of its risk-free debt is $60 million. The beta of the company's common stock is 0.8 and the expected market risk premium is 10 percent. If the Treasury bill rate is 6 percent, what is the firm's cost of capital? (Assume no taxes.)

A) 9.2 percent
B) 14.0 percent
C) 8.1 percent
D) 10.8 percent