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%?

Name: 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%?
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Quizplus · Accepted Answer

D/V = 1/5 and E/V = 4/5; 0.186 = 1/5(0.094)(1 - 0.34) + 4/5(r_e); r_e = 21.70%

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