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30 August, 16:15

Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 9.96%. What is Percy's cost of common equity?

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  1. 30 August, 16:39
    0
    13 %

    Explanation:

    rd = 9%

    T = 40%

    WACC = 9.96%

    wd = 40%

    wc = 60%

    WACC = (wd) (rd) (1 - T) + (wc) (rs)

    0.0996 = (0.4) (0.09) (1 - 0.4) + (0.6) rs

    0.0996 = 0.0216 + 0.6rs

    0.078 = 0.6rs

    rs = 13%
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Home » Engineering » Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 9.96%.
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