Company B current equity beta, debt beta, and cost of equity are 1.6, 0, and 12 percent, respectively. The current (and expected future) tax rate and risk-free rate are 35 percent and 4 percent, respectively. Debt and equity are currently 300 and 600 respectively. The company plans to increase its debt-to-equity ratio (before tax) to 100 percent (leaving its debt beta unchanged). After this increase in leverage, company B cost of equity will be:

a. 10.04%

b. 13.96%

c. 20%

d. 12%

Year

Profit or loss

t+1 t+2 t+3

100 120

60

Ending value of business assets 10301060 1000

Ending value of debt 720 740 800

At the end of year t, company E book values of business assets and debt are 1,000 and 700, respectively. The analyst expects that after year t+3, company E will reach a competitive equilibrium, i.e., growth rate will be zero. Company E cost of equity is 10 percent. Under these assumptions, the analyst estimate of company E equity value at the end of year t is