A firm uses only debt and equity in its capital structure. The firm’s weight of debt is 75 percent. The firm could issue new bonds at a yield to maturity of 12 percent and the firm has a tax rate of 21 percent. If the firm’s WACC is 13 percent, what is the firm’s cost of equity?
13% = 0.75(12%)(1 − 0.21) + (1 − 0.75)(Cost of equity); Cost of equity = 23.56%.
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