Question

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?

Answer 1

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%

Answer 2

Answer:

WACC 10.995

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%