Question

Pearson Motors has a target capital structure of 35% debt and 65% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 10.90%. What is Pearson's cost of common equity

Answer 1

Answer:

13.86%

Explanation:

WACC = cost of equity x percentage of equity + (cost of debt x percentage of debt x ( 1 - tax rate))

0.65 x e + (9 x 0.6 x 0.35) = 10.90

cost of equity = 13.86%