Question
Company A and Company B are identical in every respect except Company A is unlevered while Company B has $2 million of perpetual debt with
Company A and Company B are identical in every respect except Company A is unlevered while Company B has $2 million of perpetual debt with an interest rate of 4%. Expected EBIT for both firms is $600,000 in perpetuity and all available earnings are immediately distributed to shareholders. The market value of Company A stock is $5 million while the market value of Company B stock is $4 million. There are no taxes. Assume all of the Modigliani and Miller (M&M) assumptions are satisfied. What is the cost of equity for company B?
(Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of 25.36% should be entered as 25.36)
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