David Ortiz Motors has a target capital structure of 40% debtand 60% equity. The yield...

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David Ortiz Motors has a target capital structure of 40% debtand 60% equity. The yield...

David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 7%, and the company's tax rate is 25%. Ortiz's CFO has calculated the company's WACC as 8.1%.

What is the company's cost of equity capital? Round your answer to the nearest whole number.

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Answer 1

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Answer #1

WACC = weight of debt * after tax cost of debt + weight of equity * cost of equity

=>

8.1% = 0.4 * 7% * (1-0.25) + 0.6 * cost of equity

=>

cost of equity = 10%

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Answer 2

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David Ortiz Motors has a target capital structure of 40% debtand 60% equity. The yield...

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