A company wants to maintain a proportion of debt/equity at 20%/80%. If the WACC is 18.6%,...
A company wants to maintain a proportion of debt/equity at 20%/80%. If the WACC is 18.6%, and the pre-tax cost of debt is 9.5%, what is the cost of common equity assuming a tax rate of 35%?
A) 19.90%
B) 20.90%
C) 21.71%
D) 22.73%
Homework Answers
WACC = Weights * costs
0.186 = 0.2*0.095*(1 - 0.35) + 0.8*Cost of common equity
0.186 = 0.01235 + 0.8*Cost of common equity
0.17365 = 0.8*Cost of common equity
Cost of common equity = 0.2171 or 21.71%
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