Cosmo has a weighted average cost of capital of 6.00%. Estimate Cosmo's cost of equity given...
Cosmo has a weighted average cost of capital of 6.00%. Estimate Cosmo's cost of equity given the following information: The firm's effective tax rate is 25%, they have an equal mix of debt and equity, the required return on the market portfolio is 9%, Cosmo has a before-tax cost of debt of 6%, and the risk-free rate of return is 3%.
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Homework Answers
after tax cost of debt = before tax cost * (1- tax rate)
=>6.00*(1-0.25)
=>4.5%
given WACC = 6.00%.
weight of equity and debt = 0.50 each (since they are equally weighted).
WACC = [weight of equity *cost of equity] + [weight of debt * after tax cost of debt]
=>[0.50*x] + [0.50*4.5]
=>6 = 0.50x +2.25
=>0.50x=3.75
=>x =7.5
cost of equity = 7.5.%
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