A company's CFO wants to maintain a target debt-to-equity ratio of 1/4.If the WACC is 18.6%, and the pretax cost of debt is 9.4%, what is the cost of common equity assuming a tax rate of 34%?

Question

Quizplus · Accepted Answer

The cost of common equity is calculated using the WACC formula: 0.186 = (1/5)(0.094)(1 - 0.34) + (4/5)(re). Solving for re gives approximately 21.70%.

A Company's CFO Wants to Maintain a Target Debt-To-Equity Ratio