Question

Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company’s outstanding bonds is 9%, and its tax rate is 40%. Percy’s CFO estimates that the company’s WACC is 9.96%. What is Percy’s cost of common equity?

Answer 1

13 %

Step-by-step explanation:

rd= 9%

T = 40%

WACC = 9.96%

wd = 40%

wc = 60%

WACC= (wd)(rd)(1 – T) + (wc)(rs)

0.0996 = (0.4)(0.09)(1 – 0.4) + (0.6)rs

0.0996 = 0.0216 + 0.6rs

0.078= 0.6rs

rs= 13%