Question

WayneTech has a pretax cost of debt of 5.8 percent and a return on assets of 11.3 percent. The debt–equity ratio is 0.59. Ignore taxes. What is the cost of equity?

a) 5.8%
b) 11.3%
c) 8.35%
d) 16.7%

Answer 1

The cost of equity for WayneTech is approximately 8.055%.

Step-by-step explanation:

To find the cost of equity, we need to use the formula: Cost of Equity = Return on Assets - (Debt/Equity Ratio) * (Return on Assets - Cost of Debt).

In this case, the return on assets is 11.3 percent, the debt-equity ratio is 0.59, and the cost of debt is 5.8 percent.

Substituting these values into the formula, we get: Cost of Equity = 11.3% - (0.59) * (11.3% - 5.8%) = 11.3% - (0.59 * 5.5%) = 11.3% - 3.245% = 8.055%.

Therefore, the cost of equity is approximately 8.055%, which is option c.