Ignoring taxes, Pewter & Glass has a weighted average cost of capital of 10.82 percent. The company can borrow at 7.4 percent. What is the cost of equity if the debt-equity ratio is .68?
A) 12.87%
B) 13.15%
C) 11.09%
D) 15.85%
E) 12.49%

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of debt:

Cost of debt = 7.4%

Next, we can use the debt-equity ratio to calculate the equity portion of the company's capital structure:

Equity proportion = 1 - Debt-equity ratio = 1 - 0.68 = 0.32

Now we can use the weighted average cost of capital formula to calculate the cost of equity:

Weighted average cost of capital = (equity proportion x cost of equity) + (debt proportion x cost of debt)

10.82% = (0.32 x cost of equity) + (0.68 x 7.4%)

Solving for cost of equity, we get:

Cost of equity = (10.82% - 0.68 x 7.4%) / 0.32 = 13.15%

Therefore, the best choice is B (13.15%).

Ignoring Taxes, Pewter & Glass Has a Weighted Average Cost