Ask Question
15 August, 23:57

Lamey Co. has an unlevered cost of capital of 10.9 percent, a tax rate of 35 percent, and expected earnings before interest and taxes of $21,800. The company has $25,000 in bonds outstanding that sell at par and have a coupon rate of 6 percent. What is the cost of equity?

+4
Answers (1)
  1. 16 August, 02:11
    0
    cost of equity is 11.60 %

    Explanation:

    Given data

    cost of capital = 10.9 percent

    tax rate = 35 percent

    earnings = $21,800

    bonds outstanding = $25,000

    rate = 6 %

    to find out

    cost of equity

    solution

    we will find first value of unlevered

    value of unlevered = earning (1 - tax rate) / cost of capital

    value of unlevered = 21800 (1 - 0.35) / 0.109 = $130000

    so

    value of unlevered will be for firm = 130000 * bond outstanding * tax rate

    value of unlevered will be for firm = 130000 * 25000 * 35%

    value of unlevered will be for firm = $138750

    so value of firm will be = bond outstanding + equity

    so equity will be = 138750 - 25000

    equity = $113750

    so now

    cost of equity will be = cost of capital + (cost of capital - rate) (bonds / equity) (1 - tax rate)

    cost of equity will be = 10.9% + (10.9 % - 6%) (25000 / 113750) (1-0.35)

    so cost of equity = 11.60 %
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Lamey Co. has an unlevered cost of capital of 10.9 percent, a tax rate of 35 percent, and expected earnings before interest and taxes of ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers