COST OF COMMON EQUITY Pearson Motors has a target capital structure of 30% debt

Question

COST OF COMMON EQUITY

Pearson Motors has a target capital structure of 30% debt and 70% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 8%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 13.50%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

COST OF COMMON EQUITY

Pearson Motors has a target capital structure of 30% debt and 70% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 8%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 13.50%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

Explanation / Answer

WACC = 13.50%

Weight of Debt = 0.30

Weight of Equity = 0.70

Cost of Debt = 8%

Tax = 40%

COst of debt after tax = 8% * (1 - 40%)

COst of debt after tax = 4.8%

WACC = Weight of Debt * After tax cost of debt + Weight of Equity * Cost of Equity

13.50% = 0.30 * 4.8% + 0.70 * Cost of Equity

Cost of Equity = 17.23%

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