Arrow Corp. has a WACC of 8.78%, a before-tax cost of debt of 6%, and a tax rate of 40%. If the firm is financed 30% with debt and the balance with equity, what is the cost of equity?
A) 10.50%
B) 11.00%
C) 11.50%
D) 12.00%
B
Explanation: B) Ke = (WACC - wd*Kd*(1-t))/We = (8.78% - .30 * 6% * (1-.40 )/.7 = 11.0%.
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