Question

Dee’s Toys has a target debt-total assets ratio of 28 %. Its WACC is 12.7 percent and the tax rate is 26 percent. What is the cost of equity if the after tax cost of debt is 4.6 percent? Show your answer to the nearest .1%. Do now use the % sign in your answer. Thus an answer of 10.1% would be shown at 10.1 rather than 10.1% or .101.

Answer 1

Dee's Toys Debt-to Total Assets Ratio = 28%

- If Debt-to Total Assets Ratio is 28% it means that Equity to Total Asset will be 72% as Total Assets = Total Debt + Total Equity

So, weight of weight is 28% while weight of Equity is 72%

- Weighted average cost of capital(WACC) = 12.7%

WACC= (Weight of Debt)(After- Tax Cost of Debt) + (Weight of Equity)(Cost of Equity)

12.7% = (0.28)(4.6%) + (0.72)(Cost of Equity)

12.7% = 1.288% + (0.72)(Cost of Equity)

11.412% = (0.72)(Cost of Equity)

Cost of Equity = 15.85%

So, Cost of Equity is 15.9%

If you need any clarification, you can ask in comments.    

If you like my answer, then please up-vote as it will be motivating