The Fabric Mill Has Debt with Both a Face and a Market

Multiple Choice

The Fabric Mill has debt with both a face and a market value of $6,500. This debt has a coupon rate of 8% and pays interest annually. The expected earnings before interest and taxes are $1,400, the tax rate is 35%, and the unlevered cost of capital is 14%. What is the firm's cost of equity?

A) 17.90%
B) 18.56%
C) 22.40%
D) 23.59%
E) 25.14%