le 5 Homework ssignment Module 5 Homework Aignment Score 000

le 5 Homework ssignment: Module 5 Homework A..ignment Score 000% ave Submit Assignment for Grading Questions Problem 10.03 Question 3 of20 Check My Work (3 remaining) Ol Click here to read the eBook: The Cost of Retained Earnings, rs COST OF COMMON EQUITY 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 13.00%, what is Pearson\'s cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places o 10. 12. 13. Check My Work (3 remaining) esc 20 F2 2 4

Solution

Answer: 16.77%

Explanation:

WACC = (We * Ke) + Wd * Kd * (1 – Tax rate)

We = Weight of Equity

Ke = Cost of Equity

Wd = Weight of debt

Kd = Cost of debt

Substution og given values

0.13 = (0.65*Ke)+ 0.35*0.1*(1-0.40)

0.13 = (0.65*Ke)+ 0.021

0.65*Ke = 0.13-0.021

0.65*Ke = 0.109

Ke = 0.109/0.65

Ke = 0.1677 ~ 16.77%