Garnet, Inc., has a target debt-equity ratio of 0.39. Its WACC is 11.7 %, and the...

Garnet, Inc., has a target debt-equity ratio of 0.39. Its WACC is 11.7 %, and the tax rate is 31 %

If you know that the after-tax cost of debt is 5.8%, what is the cost of equity? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).

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Expert Solution

Weight of debt = Debt/(Debt + Equity)

Debt-Equity Raio = 0.39

This implies if equity = 1, debt = 0.39

Weight fo debt = 0.39/(0.39 + 1) = 0.2806

Weight fo equity = 1/(0.39 + 1) = 0.7194

11.7% = 0.2806 * 5.8% + 0.7194 * Cost of Equity

11.7% = 1.63% + 0.7194 * Cost of Equity

Cost of Equity = 14.00%

jeff jeffy answered 2 years ago

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