Johnson Fuel Systems has a weighted average cost of capital of 7.35%. Estimate Johnson'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%, Johnson has a before-tax cost of debt of 6%, and the risk-free rate of return is 3%.
A) 2.25%
B) 5.10%
C) 9.00%
D) 10.20%

Question

Quizplus · Accepted Answer

Using the WACC formula: WACC = E/V * Re + D/V * Rd * (1 - Tc), where E/V = 0.5, D/V = 0.5, Rd = 6%, Tc = 25%, and WACC = 7.35%. Solving for Re gives Re = 10.20%.

Johnson Fuel Systems Has a Weighted Average Cost of Capital