FIN 3220 Business Finance (005)-Fal12017 Homework: HW of CH12 Save Score: 0 of 1

Question

FIN 3220 Business Finance (005)-Fal12017 Homework: HW of CH12 Save Score: 0 of 1 pt 7of9-complete) HW Score: 72.22%, 6.5 of 9 Problem 12.LO3.20 (similar to) Question Help RDA Mines Inc.oerates an unobtanum mine on the planet Abe ta which is a satel te in te A pha Certarsystem near Pandra. The people of Aberta have instituted a corporate tax at the rate of 38% weighted average cost of capital is 12%, RDA has 2556 debt in its captal structure (debt equity is 033) and the bore-tax cost of debt is 7% what is the oost of oquty for RDA gion its WACC? RDA's The cost of oquity for RDA given its WACC is% (Round to two decinal places) Enter your answer in the answer box and then click Check Answer All parts showing Chack An Clear All

Explanation / Answer

Ke = Wd x Kd + We x Ke

Where,

Ke = Weighted Average cost of capital = 12%

Wd = Weight of debt = 0.25

Kd = Cost of debt = Before tax cost of debt x (1 – tax rate)

= 7% x ( 1 – 0.38)

= 4.34%

We = weight of equity = 1 – Weight of debt

= 1 – 0.25

= 0.75

Ke = Cost of equity

So, putting these values in above equation we get

12 = 0.25 x 4.34 + 0.75 x Ke

So, 0.75 x Ke = 12 - 1.085

So, Ke = 10.915 / 0.75

= 14.55%

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