Question

Currently, a company is financed with 40% equity and 60% debt. The debt consists of 15-year $1,000 face-value bonds that pay semi-annual interest payments based on an annual coupon rate of 7%. The market price of the firm’s bonds is currently $1034. Further, the company has a beta of 1.4. The expected return on the market is expected to be 14% while the risk free rate is 4%. The marginal tax rate is 40%. What is the company's cost of equity? 10.8% 18.0% 14.0% 14.2%

Answer 1

Answer:

the cost of the equity of the company is 18%

Explanation:

The computation of the cost of equity is as follows

Cost of equity = Risk free rate of return + beta × (market rate of return - risk free rate of return)

= 4% + 1.4 × (14% - 4)

= 4% + 1.4 × 10%

= 4% + 14%

= 18%

Hence, the cost of the equity of the company is 18%

We simply applied the above formula so that the accurate percentage could come

Therefore the second option is correct