Firm L has debt with a market value of $200,000 and a yield of 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity?
Firm L has debt and so is a levered firm. The cost of equity for a levered firm is ...
The solution explains how to calculate the cost of equity under the MM extension with growth.