A firm uses only debt and equity in its capital structure. The firm's weight of debt is 45%. The firm could issue new bonds at a yield to maturity of 10% and the firm has a tax rate of 30%. If the firm's WACC is 12%, what is the firm's cost of equity?
A) 16.09%
B) 15.63%
C) 15.21%
D) 14.57%

Question

Quizplus · Accepted Answer

The firm's WACC is calculated as: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc). Given WACC = 12%, D/V = 0.45, Rd = 10%, Tc = 0.30, we solve for Re (cost of equity): 12% = (0.55) * Re + (0.45) * 10% * (1 - 0.30). Solving gives Re = 16.09%.

A Firm Uses Only Debt and Equity in Its Capital