Tortuga is looking to expand. The firm has a $50 million revolving line of credit and currently has $10 million drawn at an interest rate of 3-month Libor plus 150 basis points. The remainder credit line can be assumed to have no fees associated with it. The outlook for the most recent 3-month U.S. dollar Libor rate is 2.50%.

Long-term financing is also in place in two forms. After several years of revenue and earnings growth, Tortuga issued one million shares of common stock at an issue price of $10 per share. The firm used this $10 million in funding to increase production lines and build a global presence by opening an additional manufacturing facility in Panama. The current price of Tortuga shares is $28. Two years ago, Tortuga issued a seven-year bond for $5.0 million face value. Each $1,000 par bond carries a coupon of 7.75%. The bond pays interest semi-annually and is currently trading in the market at 103.25 as a percent of par. The company has a 25% corporate tax rate.

The firm calculates its required return on equity with the Capital Asset Pricing Model (CAPM) using a 4.0% historical Treasury rate for the risk-free rate and 6.0% as the historical market risk premium. Tortugas beta is 1.15.

Using the Capital Asset Pricing Model, what is the required rate of return on equity, rs (cost of equity) for Tortuga?

11.50%

10.90%

13.22%

12.70%