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21 February, 21:54

Pearson Motors has a target capital structure of 45% debt and 55% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 8%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 12.80%. What is Pearson's cost of common equity

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  1. 21 February, 22:33
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    The company's cost of common equity is 19.3%

    Explanation:

    To calculate the company's cost of common equity we have to use the formulate to calculate the WACC.

    WACC = WEKE + (WDKD x (1 - T))

    0.1280 = (0.55 x KE) + ((0.45 x 0.08) x (1 - 0.40))

    0.1280 = 0.55KE + (0.036 x 0.60)

    0.55KE = 0.1280 - 0.0216

    0.55KE = 0.1064

    KE = 0.1064 / 0.55

    KE = 0.193 or 19.3%
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Home » Business » Pearson Motors has a target capital structure of 45% debt and 55% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 8%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 12.
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