Pearson Motors has a target capital structure of 45% debt and 55% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 11%, and its tax rate is 25%. Pearson's CFO estimates that the company's WACC is 10.60%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.
% ?
WACC is weithed Avg cost of Sources in capital Structure.
After Tax cost of Debt = YTM (1- Tax Rate )
= 11% * ( 1 - 0.25)
= 11% * 0.75
= 8.25%
WACC:
Source | Weight | Cost | Wtd Cost |
Equity | 55% | X | 0.55X |
Debt | 45% | 8.25% | 0.0371 |
WACC | 0.55X + 0.0371 |
Given WACC is 0.1060
Thus 055X + 0.0371 = 0.1060
0.55X = 0.1060 - 0.0371
= 0.0689
X = 0.0689 / 0.55
= 0.1253 i.e 12.53%
Cost of equity is 12.53%
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