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Katena32 [7]
2 years ago
9

Wild Flowers Express has a debt-equity ratio of .60. The pretax cost of debt is 9 percent while the unlevered cost of capital is

14 percent. What is the cost of equity if the tax rate is 23 percent
Business
1 answer:
andre [41]2 years ago
4 0

Answer:

0.1631 ; 16.31%

Explanation:

Given:

Cost of capital = 14% = 0.14

Debt to equity ratio = 60% = 0.6

Cost of debt = 9% = 0.09

Tax rate = 23% = 0.23

Cost of equity : cost of capital + debt - to - equity ratio * (1 - tax rate) * (cost of capital - cost of debt)

Cost of equity = 0.14 + 0.60 × (1 - 0.23) × (0.14 - .09)

Cost of equity :

0.14 + 0.60 * 0.77 * 0.05

0.14 + 0.0231

= 0.1631 ; 0.1631 * 100% = 16.31%

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