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    RMW's Avatar
    RMW Posts: 1, Reputation: 1
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    #1

    Oct 1, 2007, 12:16 PM
    Cost of common equity
    With a Po of 22.5 div of 2 and a rate of 7 what would be the cost of equity? 40% debt and 60% common equity before tax debt 12%
    ake_finance's Avatar
    ake_finance Posts: 19, Reputation: 1
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    #2

    Oct 1, 2007, 08:40 PM
    ke = Cost of equity = D1/P0 + g
    from your information I'am not sure about the given div whether it is D0 or D1, but I think div of 2 is already D1, so I don't multiply 2 with 1.07
    ke = 2/22.5 + 7% = 15.89%

    WACC = (Wd*Kd)+(We*Ke)
    WACC = (0.4*kd) + (0.6*15.89%)
    We cannot find WACC due to lack of information about kd and tax rate, what is 12% that you give?However, if you have that information, you can complete the calculation of WACC.
    conrad1003's Avatar
    conrad1003 Posts: 1, Reputation: 1
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    #3

    Jun 5, 2011, 08:10 PM
    The after cost of debt = 12%(1-0.40)= 7.20%

    D1 = Do(1+g)= 2(1+7%)= 2.14

    The cost of common equity (rs)=(D1/Po)+ g = (2.14/22.50)+ 7% = 16.51%

    WAAC = 40%*(7.20%) + 60%*(16.51%) = 12.79%
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