Question

Plantronics has debt with both a face and a market value of $3,000. This debt has a coupon rate of 7 percent and pays interest annually. The expected earnings before interest and taxes is $1,200, the tax rate is 34 percent, and the unlevered cost of capital is 12 percent. What is the firm’s cost of equity?

Answer 1

%14.4

Step-by-step explanation:

Vu= [EBIT  (1 - T c )]  R U = [$1,200  (1- .34)]  .12 = $6,600 V L = V U + (T c  D) = $6,600 + (.34  $3,000) = $7,620 V L - V D = V E = $7,620 - $3,000 = $4,620 R E = R U + (R U - R D )  D/E  (1 - T C ) = .12 + [(.12 - .07)  ($3,000  $4,620)  (1 - .34)] = .12 + .02143 = .14143 = 14.14%