Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 9.96%. What is Percy's cost of common equity?

Question

Engineering

Jamison Salazar

19 November, 02:02

Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 9%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 9.96%. What is Percy's cost of common equity?

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Kaden Reeves · Answer 1

13 %

Explanation:

rd = 9%

T = 40%

WACC = 9.96%

wd = 40%

wc = 60%

WACC = (wd) (rd) (1 - T) + (wc) (rs)

0.0996 = (0.4) (0.09) (1 - 0.4) + (0.6) rs

0.0996 = 0.0216 + 0.6rs

0.078 = 0.6rs

rs = 13%