Flyover Airlines Inc. has a cost of equity equal to 24.67%. If the fir

Flyover Airlines Inc. has a cost of equity equal to 24.67%. If the firm is financed with 40% debt and 60% equity and has an average cost of capital of 18%, what is the cost of debt? Assume perfect capital markets.

A) 8.00%
B) 6.67%
C) 10.00%
D) 12.33%

ANSWER

A
Explanation: A) Kd = (Ku – Ke)(E/D) +Ku = (18% – 24.67%) * (.6/.4 ) + 18% = 8.00%.