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23 November, 11:52

Ignoring taxes, Pewter & Glass has a weighted average cost of capital of 10.82 percent. The company can borrow at 7.4 percent. What is the cost of equity if the debt-equity ratio is. 68?

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  1. 23 November, 12:18
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    Cost of Equity = 13.15%

    Explanation:

    Debt-Equity Ratio Debt / Equity

    Debt = 0.68 * Equity

    Let Equity = x

    Debt = 0.68x

    Total = $1.68x

    WACC = Respective Costs * Respective Weights

    10.82 = (x/1.68x*Cost of equity) + (0.68x/1.68x*7.4)

    10.82 = (Cost of equity/1.68) + 2.995238095

    Cost of Equity = (10.82-2.995238095) * 1.68

    Cost of Equity = 13.15%
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