COST OF COMMON EQUITY Pearson Motors has a target capital structure of 30% debt
ID: 2797695 • Letter: C
Question
COST OF COMMON EQUITY
Pearson 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%. Pearson's CFO estimates that the company's WACC is 13.50%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.
COST OF COMMON EQUITY
Pearson 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%. Pearson's CFO estimates that the company's WACC is 13.50%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.
Explanation / Answer
WACC = 13.50%
Weight of Debt = 0.30
Weight of Equity = 0.70
Cost of Debt = 8%
Tax = 40%
COst of debt after tax = 8% * (1 - 40%)
COst of debt after tax = 4.8%
WACC = Weight of Debt * After tax cost of debt + Weight of Equity * Cost of Equity
13.50% = 0.30 * 4.8% + 0.70 * Cost of Equity
Cost of Equity = 17.23%