Student Exam

4. (TCO B) Firm L has debt with a market value of $215,000 and a yield of 9%. The firm's equity has a market value of $400,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity? (a) 11.4% (b) 12.0% (c) 13.6% (d) 13.3% (e) 14.0% (Points : 20)