The Outlet has an unlevered cost of capital of 14.2 percent,a tax rate of 35 percent,and expected earnings before interest and taxes of $23,400.The company has $23,000 in bonds outstanding that have a coupon rate of 7 percent.The bonds are selling at par.What is the cost of equity?

Question

Quizplus · Accepted Answer

V_U = [$23,400 × (1 - .35)]/.142 = $107,112.68V_L = $107,112.68 + (.35 × $23,000)= $115,162.68V_S = $115,162.68 - 23,000 = $92,162.68R_s = .142 + ($23,000/$92,162.68)(1 - .35)(.142 - .07)= .1537 or 15.37%

The Outlet Has an Unlevered Cost of Capital of 14