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Ksenya-84 [330]
3 years ago
15

Winter's Toyland has a debt-equity ratio of .57. The pretax cost of debt is 8.2 percent and the required return on assets is 14.

7 percent. What is the company's cost of equity if you ignore taxes?
Business
2 answers:
Nataly [62]3 years ago
8 0

Answer:The answer is 18.41%

Explanation: =Cost of equity (Ke) is the rate of return a shareholder requires for investing in a business. Given return on asset and debt-equity, cost of equity will be;

Return on asset + (Return on asset - pre tax cost of debt) × debt to equity

Ignoring tax, cost of equity will be

= 0.147 + (0.147 - 0.082) × 0.57 = 0.18405 * 100

= 18.405%

True [87]3 years ago
6 0

Answer:

<em>WACC 10.995</em>

Explanation:

We solve using the Weighted average cost of capital assuming a tax rate of 0% as we have to ignore taxes. Hence, we get:

WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})

Ke 0.14700

Equity weight 0.43

Kd 0.082

Debt Weight 0.57

t 0

WACC = 0.147(0.43) + 0.082(1-0)(0.57)

WACC 10.99500%

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