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Leverage and Capital Structure: Delta Mowers Example

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Delta Mowers has a debt-equity ratio of 1.2. Its WACC is 10.1 percent and its cost of debt is 7.5 percent. There is no corporate tax. What is the firm's cost of equity capital?

a) 12.60
b) 13.22
c) 13.83
d) 14.29
e. 14.80

I am having difficulty solving this because I am unsure of what the M&M Proposition II equation requires. Both my instructor and textbook are not helpful in explaining how to solve this problem.

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Solution Summary

Solution calculates the firm's cost of equity capital.

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