Union Brick Inc. has a total market value of $200 million, consisting of 2 millions shares of common stock selling for $50 each and $100 million of 10 percent perpetual bonds currently selling at par. UBI pays out all earnings as dividends, and its marginal tax rate is 40 percent. The firm’s earnings before interest and taxes (EBIT) are $30 million. Management is considering increasing UBI’s debt to $140 million by calling in all the old bonds and issuing new debt with a 12 percent coupon which sells at par. The additional funds will be used to repurchase stock at the new equilibrium price. If UBI’s financial leverage is increased as described, the required rate of return on common equity will increase to 15 percent. 12. What is UBI’s current required rate of return on equity? ANSERS IS (C) A) 10% B) 11% C) 12% D) 13% E) 14%.