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Good Morning! What formula to use to obtain the cost of capital and how is it...

Good Morning!

What formula to use to obtain the cost of capital and how is it set up? See the question below. The book and tutorials give multiple steps but the one formula is showing WACC= Debt*Outstanding Bonds*(1-tax rate) + Equity*Cost of Equity Capital. The question is to solve for the cost of equity capital.  

David Ortiz Motors has a target capital structure of 12% debt and 88% equity. The yield to maturity on the company’s outstanding bonds is 3.7%, and the company’s tax rate is 23%. Ortiz’s CFO has calculated the company’s WACC is 8.63%. What is the company’s cost of equity capital?

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Answer #1

We need to solve for cost of equity from the below formula of WACC:

So the cost of equity is 9.42%

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