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Question 16.S-TP.2: M&M Proposition II (no taxes) The Habitat Corporation ha...

M&M Proposition II (no taxes) The Habitat Corporation has a WACC of 16 percent. Its cost of debt is 13 percent. If Habitat’s debt-equity ratio is 2, what is its cost of equity capital? Ignore taxes in your answer.

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According to M&M Proposition II (no taxes), the cost of equity is:
R_{E} = R_{A} + (R_{A} − R_{D}) × (D/E)
= .16 + (.16 − .13) × 2
= .22, or 22%

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