Question

1.A firm has a capital structure that is 30% Debt, and 70% equity. Its YTM on current bonds is 9%, and its tax rate is 25%. If the WACC is 10.5%, what is the cost of equity?

2.A firm has a 30% tax rate, and a 3% cost to issue new common stock.

It has determined the optimal capital structure as shown in the table below. What is the firm's cost of capital?

Type of Capital	Capital Structure		Cost of Capital	WACC
	$000s	% of total capital
Debt	15000		0.06
Retained Earnings	47000		0.12
New Common Stock	22000
Total Capital

Answer 1

Hi

As per policy we will solve only first question here.

here D/V = 0.3

E/V =0.7

WACC = (D/V)*(1-t)*cost of debt + E/V*cost of equity

10.5 = 0.3*(1-0.25)*9 + 0.7*cost of equity

10.5 = 2.025 +0.7*cost of equity

cost of equity = 8.475/0.7 = 12.11%

Thanks