Answer:
The cost of equity for ABC is 11.74 percent and for XYZ it is 14.47 percent.
Explanation:
a. For ABC
ABC cost of equity = Earning before interest and tax (EBIT) / Equity = $62,222 / $530,000 = 0.1174, or 11.74%
b. For XYZ
Perpetual debt = $530,000 - $310,000 = $220,000
Interest on debt = $220,000 * 7.9% = $17,380
Earning after interest = $62,222 - $17,380 = $44,842
XYZ cost of equity = $44,842 / $310,000 = 0.1447, or 14.47%
