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    Cost of Equity for ABC Inc.

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    ABC Inc. has debt with both a face and a market value of $3,000. This debt has a coupon rate of 7% and pays interest annually. The expected earnings before interest and taxes is $1,200, the tax rate is 34%, and the unlevered cost of capital is 12%. What is the firm's cost of equity?

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    https://brainmass.com/business/flow-to-equity/cost-equity-135931

    Solution Preview

    According to Modigliani-Miller Proposition II with corporate taxes:
    rS = r0 + (B/S)(r0 - rB)(1 - TC)
    where r0 = the required return on the equity of an unlevered firm
    rS = the required return on the equity of a levered firm
    rB = ...

    Solution Summary

    The solution explains step-by-step how to calculate the cost of equity.

    $2.49

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