Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent, and expected earnings before interest and taxes of $15,700. The company has $11,000 in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?

Question

Quizplus · Accepted Answer

V_U = [$15,700 F1F1F1S1F1F1F10 (1- 0.38)]/0.12 = $81,116.67V_L = $81,116.67 + (0.38 F1F1F1S1F1F1F10 $11,000) = $85,296.67V_E = $85,296.67 - $11,000 = $74,296.67R_E = 0.12 + [(0.12 - 0.06) F1F1F1S1F1F1F10 ($11,000/$74,296.67) F1F1F1S1F1F1F10 (1 - 0.38)] = 12.55 percent

Country Markets Has an Unlevered Cost of Capital of 12