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David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield...

David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 9%, and the company's tax rate is 21%. Ortiz's CFO has calculated the company's WACC as 12%. What is the company's cost of equity capital?

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Answer #1

WACC = Weight of debt * Pretax cost of debt * (1 - Tax) + Weight of Equity * Cost of Equity

12% = 40% * 9% * (1 - 21%) + 60% * Cost of Equity

12% = 2.844% + 60% * Cost of Equity

Cost of Equity = 15.26%

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