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 $12,000 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 × (1 - 0.38)]/0.12 = $81,116.67V_L = $81,116.67 + (0.38 × $12,000) = $85,676.67V_E = $85,676.67 - $12,000 = $73,676.67R_E = 0.12 + [(0.12 - 0.06) × ($12,000/$73,676.67) × (1 - 0.38)] = 12.61 percent

Country Markets Has an Unlevered Cost of Capital of 12