Vafeas Inc. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20% debt and 80% equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6% and the market risk premium is 5%. Currently the companys cost of equity, which is based on the CAPM, is 12% and its tax rate is 40%. What would be Vafeas estimated cost of equity if it were to change its capital structure to 40% debt and 60% equity?

• A.

  13%

• B.

  13.30%

• C.

  14.35%

• D.

  14.72%

• E.

  15.60%