1. A levered firm has a pretax cost of debt of 7.8 percent and an unlevered cost of capital of 14 percent. The tax rate is 35 percent and the cost of equity is 16.25 percent. What is the debt-to-equity ratio?
A. 0.56
B. 0.41
C. 0.47
D. 0.53
2. A firm has zero debt and an overall cost of capital of 11.5 percent. The firm is considering a new capital structure with 55 percent debt at an interest rate of 6.5 percent. Assume there are no taxes or other imperfections. What will be the cost of equity capital of the levered firm?
A. 21.16 percent
B. 17.61 percent
C. 19.83 percent
D. 13.67 percent