Answer to Question #250842 in Finance for Sanchi

Question #250842

The comparable company has a beta at 1.2 with D/A ratio being 0.2. D/A ratio of the target company is 0.5. Marginal tax rate is 40%. Rf is 8%. Expected market return is 20%. What is the cost of equity for the target company?


1
Expert's answer
2021-10-14T14:29:12-0400

Cost of Equity (COE): "Rf + \u03b2 [E(m) \u2013 R(f)]"

where,

"Rf =" Risk-Free Rate of Return

β = Beta of the stock

"E(m) ="  Expected market return

"COE= 0.08 + 1.2 (0.2 - 0.08)\\\\COE = 0.224"


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