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ATR Company has a debt-to-equity ratio of 1/4
ATR Company has a debt-to-equity ratio of 1/4. If the WACC is 19.20% and the pretax cost of debt is 11.00%, what is the cost of common equity assuming a tax rate of 49%?
a)
17.38%
b)
24.00%
c)
21.25%
d)
22.60%
e)
23.73%
Expert Solution
After tax cost of debt =cost of debt (1-tax rate)
=11* (1-0.49)
=5.61%
Debt-to-equity ratio=debt/equity
debt=0.25 equity
or
Total= (1+ 0.25)
Total=$1.25 equity
WACC=Respective costs* Respective weights
19.20= (Cost of equity* equity/ 1.25 equity)+(5.61 *0.25 equity/ 1.25 equity)
Cost of equity=(19.20- 1.122)*1.25
= 22.60%
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