Answer to Question #250849 in Finance for San

Question

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?

Answer 1

Cost of Equity = Risk-Free Rate of Return + Beta × (Market Rate of Return – Risk-Free Rate of Return) 

Cost of Equity = $0.08+1.2\cdot(0.2-0.08)=0.224=22.4\%$