2. ABC Inc. is a levered company. The firm has $50 million bonds outstanding with an annual coupon rate of 4% and an YTM of 4%. It has 100 million shares outstanding with a price of $5 per share and a beta of 1.2. Corporate tax rate is assumed to be 40%. The risk rate is 2% and the expected return on the market portfolio is 10%. What is the firm’s cost of equity if the debt-to-equity ratio were 0?

Question

2.	ABC Inc. is a levered company. The firm has $50 million bonds outstanding with an annual coupon rate of 4% and an YTM of 4%. It has 100 million shares outstanding with a price of $5 per share and a beta of 1.2. Corporate tax rate is assumed to be 40%. The risk rate is 2% and the expected return on the market portfolio is 10%. What is the firm’s cost of equity if the debt-to-equity ratio were 0?