Explore BrainMass

Explore BrainMass

    Cost of Equity for ABC Inc.

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com December 24, 2021, 6:45 pm ad1c9bdddf

    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.