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johnson tire distributors has debt with both a face and a market value of $12,000. this debt has a coupon rate of 6 percent and pays interest annually. the expected earnings before interest and taxes are $2,100, the tax rate is 30 percent, and the unlevered cost of capital is 11.7 percent. what is the firm's cost of equity?

Respuesta :

The firm's cost of equity is 23.19%

VL = {[2100 × (1 - .30)] / .117} + (.30 × 12000) =  $16164.10

VE = 16164.10 - 12000 = $4164.10

Rs = .117 + [(12000 / 4164.10) × (1 - .30) × (.117 - .06)] = 0.2319 or 23.19%

What is cost of equity?

Cost of equity is the return that a business needs for a project or investment, or the return that a person needs for an equity investment. Either the dividend capitalization model or the CAPM is the formula used to determine the cost of equity.

Take, for instance, a business that currently trades at $30 and distributes a dividend of $0.30 per share every quarter ($1.20 per share annually). If this business anticipates raising its dividend by 5% annually, its cost of equity is 9% ($1.20 / $30) + 5% = 9%.

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