1. Office Supplies has a cost of equity of 13 percent and a pretax cost of debt of 7 percent. The debt-equity ratio is .50 and the tax rate is 21 percent. What is the unlevered cost of capital?
16.48%
16.03%
11.57%
11.30%
10.82%
2. An unlevered firm has expected earnings of $41,000 and a market value of equity of $350,000. The firm is planning to issue $220,000 of debt at 6 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?
13.96%
15.44%
17.31%
19.50%
21.38%