What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40% debt?

Company Y plans to diversify into an activity where Company X has an equity beta of 1.6, a debt beta of zero and gearing of 50% (debt/debt plus equity).

The risk-free rate of return is 5% and the market portfolio is expected to return 10%.

The rate of corporate income tax is 30%.

What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40% debt?
A . 11.6%
B . 11.9%
C . 9.1%
D . 13%

View Answer

Answer: B