Answer: 11.3%

**Explanation:** The correct answer is **B (11.3%)**. According to the Modigliani-Miller propositions, the cost of equity for a company with debt is calculated as: \[ r_e = r_0 + (r_0 - r_d)(1 - t)\left(\frac{D}{E}\right) \] Where: - \( r_e \) = Cost of equity - \( r_0 \) = Unlevered cost of capital (9.0%) - \( r_d \) = Cost of debt (4.0%) - \( t \) = Tax rate (25%) - \( D \) = Market value of debt (£15,000) - \( E \) = Market value of equity (£25,000, derived from £40,000 - £15,000) Substituting the values: \[ r_e = 0.09 + (0.09 - 0.04)(1 - 0.25)\left(\frac{15,000}{25,000}\right) = 0.1125 \text{ or } 11.3\% \] **Why not A or C?** - **A (10.4%)**: Incorrect because it uses the total company value instead of equity value in the calculation. - **C (12.0%)**: Incorrect because it ignores the tax shield benefit of debt, reflecting the cost of equity in the absence of corporate taxes.

Author: LeetQuiz Editorial Team