Pearson Motors has a target capital structure of 35 debt and

Pearson 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%. Pearson\'s CFO estimates that the company\'s WACC is 13.20%. What is Pearson\'s cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

Solution

After tax cost of bonds=10(1-tax rate)

=10(1-0.4)=6%

WACC=Respective costs*Respective weights

13.2=(0.35*6)+(0.65*Cost of common equity)

13.2=2.1+0.65Cost of common equity

Cost of common equity=(13.2-2.1)/0.65

which is equal to

=17.08%(Approx).