Cost of Common Equity Percy Motors has a target capital structure of 30% debt an
ID: 2636548 • Letter: C
Question
Cost of Common Equity
Percy Motors has a target capital structure of 30% debt and 70% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 8%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 13.20%. What is Percy's cost of common equity? Round your answer to two decimal places.
%
IRR
Project K costs $44,572.80, its expected cash inflows are $9,000 per year for 10 years, and its WACC is 14%. What is the project's IRR? Round your answer to two decimal places.
%
Payback period
Project K costs $60,000, its expected cash inflows are $14,000 per year for 8 years, and its WACC is 11%. What is the project's payback? Round your answer to two decimal places.
years
Explanation / Answer
Let the cost of common equity be X So, 0.7X+0.3*8*(1-0.4)=13.2 or 0.7X=13.2-8*(1-0.4) 8.4 or X=8.4/0.7 12 Cash flow -44572 9000 9000 9000 9000 9000 9000 9000 9000 9000 9000 IRR=IRR(Cash Flows,Guess) as per excel formulae 15% Amount Year Discounted@11% Cumulative Cash Flow -60000 0 -60000 -60000 14000 1 12612.61 -47387.39 14000 2 11362.71 -36024.67 14000 3 10236.68 -25787.99 14000 4 9222.23 -16565.76 14000 5 8308.32 -8257.44 14000 6 7484.97 -772.47 14000 7 6743.22 5970.75 14000 8 6074.97 12045.72 Discounted Pay-back=6+(772.47/6743.22) 6.114555