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Cost of equity

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1) A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. What is its cost of equity if there are no taxes or other imperfections?

2) Wild Flowers Express has a debt-equity ratio of .60. The pre-tax cost of debt is 9% while the unlevered cost of capital is 14%. What is the cost of equity if the tax rate is 34%?

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Solution Summary

The solution explains how to calculate the cost of equity. Imperfections of taxes are examined.

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1. WACC = Proportion of debt X cost of debt + Proportion of equity X cost of equity
We are given D/E = 0.6
We need to calculate D/(D+E) and ...

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