Assume the M&M assumptions with taxes hold. The tax rate is equal to 20%, the risk-free rate is equal to 1%, and the market risk premium is equal to 6%. Firms A and B are identical except for their capital structure. Their unlevered beta is equal to 1, and B's debt-to-equity ratio is equal to 1. You do not know A's debt-to-equity ratio, but you know that it is less than 1. What is A's cost of equity (CoE) and cost of capital (CoC)? [Hint: draw a graph with D/E on the horizontal axis and cost (of equity and capital) on the vertical axis. Then, use the information about firm B(!) to rule out false answers.]

Answer choices

CoE = 6.3% and CoC = 11.8%

CoE = 9.0% and CoC = 6.5%

CoE = 12.4% and CoC = 6.5%

CoE = 6.9% and CoC = 6.5%

CoE = 8.7% and CoC = 6.0%

CoE = 9.0% and CoC = 7.5%