Answer to Question #250849 in Finance for San

Question #250849

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
2021-10-13T15:44:24-0400

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\\%"


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