Percy Motors has a target capital structure of 35 debt and 6

Percy Motors has a target capital structure of 35% debt and 65% common equity, with no preferred stock. The yield to maturity on the company\'s outstanding bonds is 10%, and its tax rate is 40%. Percy\'s CFO estimates that the company\'s WACC is 14.00%. What is Percy\'s cost of common equity?

Solution

Hi,

WACC = Weight of Debt*After Tax Cost of Debt + Weight of Preferred Stock*Cost of Preferred Stock + Weight of Equity*Cost of Equity =

14 =.35*(1-40%)*10 + 0 + .65*Cost of Equity

Cost of Equity = (14 - 2.1)/.65 = 18.31%

Thanks.