Liabilities and Equity

The stock is currently selling for $$12\mathrm{.}25$ per share, and its noncallable $$1,000\mathrm{.}00$ par value, $20-$year, $7\mathrm{.}00\%$ bonds with semiannual payments are selling for $$1,044\mathrm{.}07.$ The beta is $1\mathrm{.}15,$ the yield on a $6-$month Treasury bill is $3\mathrm{.}50\%,$ and the yield on a $20-$year Treasury bond is $5\mathrm{.}50\%.$ The required return on the stock market is $11\mathrm{.}50\%,$ but the market has had an average annual return of $14\mathrm{.}50\%$ during the past $5$ years. The firm's tax rate is $40\%.$

Refer to Exhibit $10\mathrm{.}1.$ Based on the CAPM, what is the firm's cost of equity?

$11\mathrm{.}41\%$

$12\mathrm{.}03\%$

$13\mathrm{.}02\%$

$12\mathrm{.}40\%$

$10\mathrm{.}66\%$