An All-Equity Firm Has a Return on Assets of 15

Multiple Choice

An all-equity firm has a return on assets of 15.3 percent. The firm is considering converting to a debt-equity ratio of 0.30. The pre-tax cost of debt is 8.1 percent. Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital structure?

A) 15.57 percent
B) 16.28 percent
C) 16.67 percent
D) 17.46 percent
E) 18.19 percent