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 8%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 12.60%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.
______%
Weight of Debt = wd = 45% = 0.45
Weight of Common Equity = 55% = 0.55
Yeild to maturity on companies outstanding bonds = rd = 8%
tax rate = t = 40%
Let Cost of common equity = re
WACC = 12.6%
The below formula is used to calculate the WACC
WACC = [wd * rd * (1-t)] + [we * re]
12.6% = [0.45 * 8% * (1-40%)] + [0.55 * re]
12.6% = 2.16% + [0.55 * re]
0.55 * re = 10%
re = 18.1818182
re = 18.18%
Theredore, Pearson's cost of Equity is 18.18%
Pearson Motors has a target capital structure of 45% debt and 55% common equity, with no...
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