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    Cost of Equity under the MM extension with growth

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    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?

    a. 11.4%
    b. 12.0%
    c. 12.6%
    d. 13.3%
    e. 14.0%

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    Firm L has debt and so is a levered firm. The cost of equity for a levered firm is ...

    Solution Summary

    The solution explains how to calculate the cost of equity under the MM extension with growth.