A Firm Has Zero Debt in Its Capital Structure

Multiple Choice

A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes its cost of equity capital with the new capital structure would be:

A) 8%
B) 16%
C) 13%
D) 10%
E) None of the above
RE = 10 + (60/40) (10 - 8) = 10 + 3 = 13