Suppose Visa Inc. (V) has no debt and an equity cost of capital of 9.2 %9.2%. The average debt-to-value ratio for the credit services industry is 13 %13%. What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of 6 %6% ? The cost of equity is

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Business

Angelique Melton

28 July, 22:06

Suppose Visa Inc. (V) has no debt and an equity cost of capital of 9.2 %9.2%. The average debt-to-value ratio for the credit services industry is 13 %13%. What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of 6 %6% ? The cost of equity is

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Lorelei Dougherty · Answer 1

9.68%

Explanation:

The cost of equity:

Using this formula

rE=rU+D/E * (rU-rD)

Let plug in the above formula:

rU=0.092

D=0.13

E = (100%-13%)

=0.87

rD=0.06

rE=0.092 + 0.13/0.87 * (0.092-0.06)

rE=0.092+0.1494*0.032

rE=0.092+0.004781

= 0.0968 * 100

=9.68%