Question

The answer is a) 12.48% but how? Simple Tech Inc is an Australian company operating in a pure imputation tax system. It is currently financed entirely (100%) by equity and has a beta of 0.8. After examining its capital structure, Simple Tech finds that the optimal capital structure can be achieved at D/E ratio of 0.4. The before-tax cost of debt capital for Simple Tech at the optimal capital structure is 10% p.a. The risk-free rate and market risk premium are 5% p.a. and 7% p.a., respectively. If the statutory corporate tax rate is 30%, which of the following is closest to the cost of equity at the optimal capital structure (using the approach covered in the lecture)? a. 12.84% p.a. b. 12.17% p.a. c. 12.03% p.a. d. 11.69% p.a. e. 10.60% p.a.

          The answer is a) 12.48% but how? Simple Tech Inc is an Australian company operating in a pure imputation tax system. It is currently financed entirely (100%) by equity and has a beta of 0.8. After examining its capital structure, Simple Tech finds that the optimal capital structure can be achieved at D/E ratio of 0.4. The before-tax cost of debt capital for Simple Tech at the optimal capital structure is 10% p.a. The risk-free rate and market risk premium are 5% p.a. and 7% p.a., respectively. If the statutory corporate tax rate is 30%, which of the following is closest to the cost of equity at the optimal capital structure (using the approach covered in the lecture)?
a. 12.84% p.a.
b. 12.17% p.a.
c. 12.03% p.a.
d. 11.69% p.a.
e. 10.60% p.a.

Added by Elisa U.

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