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17 June, 16:45

Suppose Visa Inc. (V) has no debt and an equity cost of capital of 9.2 %9.2%. The average debt-to-value ratio for the credit services industry is 13 %13%. What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of 6 %6% ? The cost of equity is

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  1. 17 June, 16:54
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    9.68%

    Explanation:

    The cost of equity:

    Using this formula

    rE=rU+D/E * (rU-rD)

    Let plug in the above formula:

    rU=0.092

    D=0.13

    E = (100%-13%)

    =0.87

    rD=0.06

    rE=0.092 + 0.13/0.87 * (0.092-0.06)

    rE=0.092+0.1494*0.032

    rE=0.092+0.004781

    = 0.0968 * 100

    =9.68%
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