Pearson Motors has a target capital structure of 30% debt and 70% common equity, with no...

Pearson Motors has a target capital structure of 30% debt and 70% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 11%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 14.00%. What is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

Expert Solution

WACC is calculated by using the formula below:

WACC= wd*kd(1-t)+we*ke

Where:

Wd=percentage of debt in the capital structure

We=percentage of equity in the capital structure

Kd=cost of debt

Ke=cost of equity

t= tax rate

14%= 0.30*11%*(1-0.40) + 0.60*cost of equity

14%= 1.98% + 0.60*cost of equity

Cost of equity= 14 – 1.98/ 0.60

Cost of equity= 12.02/ 0.60

= 20.03%.

jeff jeffy answered 2 years ago

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