The management of Vibgyor Fabrics subscribes to the NOI approach and believes that its cost of debt and overall cost of capital will remain at 9% and 12% respectively. If the debt-equity ratio is 0.8, what is the cost of equity?

Correct option is C

To calculate the cost of equity (Ke) under the Net Operating Income (NOI) approach, we use the following formula derived from the relationship between the weighted average cost of capital (WACC), cost of debt (Kd), and the capital structure:

Where:
· E: Equity
· D: Debt
· V: Total value of the firm = E+D
· Ke: Cost of equity (to be calculated)
· Kd: Cost of debt = 9% = 0.09
· WCACC: Overall cost of capital = 12% = 0.12
· Debt-equity ratio (D/E) = 0.8