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Presume McDonald's determined that its optimal capital structure was 40% debt and 60% equity. Its current...

Presume McDonald's determined that its optimal capital structure was 40% debt and 60% equity. Its current before tax cost of debt (YTM) is 6% with a tax rate of 35%. If its beta is .7, the risk free rate is 4%, and the return on the market is expected to be 11%. What would be McDonald's cost of equity (Ke)?

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Answer #1

Cost of equity = risk free rate + ( return on market - risk free rate) *beta

=4%+(11%-4%)*0.7

= 8.90%

Answer: 8.90 %

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