Frankenfoods, Inc. manufactures and sells cheap frozen dinners. The firm has outstanding debt of $2 million and outstanding equity of $4 million. The debt has an interest rate of 7%. If the firm had no debt, the required return on equity would be 12% (this is the unlevered cost of equity). If the firm is subject to a corporate tax rate of 40%, what is the firms current cost of equity (required return on equity)? Except for taxes, assume that markets are perfect (no bankruptcy, etc.).

13.50%

13.89%

13.92%

14.00%