Question

Logan Corp. provides the following information:

Unlevered cost of Capital = 18%

Tax Rate = 35%

Cost of debt capital = 10%

Debt to Equity Ratio = 55%

What is the Cost of Equity?

a) 20.86%
b) 26.92%
c) 22.85%
d) 25.93%
e) 18.86%

Answer 1

The cost of equity can be calculated using the formula: Cost of Equity = Unlevered Cost of Capital + (Debt to Equity Ratio x (Unlevered Cost of Capital - Cost of Debt Capital)) x (1 - Tax Rate). Using the given information, the cost of equity in this case is 22.85%. The correct answer is option c).

Step-by-step explanation:

The cost of equity can be calculated using the formula:

Cost of Equity = Unlevered Cost of Capital + (Debt to Equity Ratio x (Unlevered Cost of Capital - Cost of Debt Capital)) x (1 - Tax Rate)

Using the given information, the calculation would be:

Cost of Equity = 18% + (0.55 x (18% - 10%)) x (1 - 0.35)

Cost of Equity = 22.85%

Therefore, option c) 22.85% is the correct answer.