Flintstone Mining Inc.has a weighted average cost of capital of 12%.Flintstone has 40% debt in its capital structure (debt-to-equity is 0.67)and the yield on Flintstone bonds is 6%.The corporate tax rate is 40%.What is the cost of equity for Flintstone?
A) 12.6%
B) 14.6%
C) 15.6%
D) 16.6%
E) 17.6%

Question

Quizplus · Accepted Answer

WACC = 11ea7fdb_fc68_4b3e_a768_4d0661fa8db1_TB2902_11 k_E + 11ea7fdb_fc68_4b3f_a768_c5adb09b7ab2_TB2902_11 k_D(1 - T) After rearranging to solve for the cost of equity: k_E = WACC + [WACC - k_D × (1 - T)] × 11ea7fdb_fc68_4b40_a768_056f42daf4a3_TB2902_11 k_E = 0.12 + [0.12 - 0.06 × (1 - 0.40)] × 0.67 = 0.176 or 17.6%