Respuesta :
The cost of equity is 12.8% with weighted average cost of capital of 10.82 percent and debt-equity ratio as .58. Hence, option (A) is relevant.
Give a brief account on debt-to-equity.
The debt-to-equity (D/E) ratio, which is computed by dividing a company's total liabilities by its shareholder equity, is used to assess a company's financial leverage. A crucial indicator in corporate finance is the D/E ratio. It is a gauge of how much debt, as opposed to cash flow from operations, is being used to fund a business. An example of a specific gearing ratio is the debt-to-equity ratio.
D/E ratio gauges how much debt a business has accumulated in comparison to the value of its assets less liabilities. The value of equity may be diminished or destroyed in the event of a default due to debt because it must be repaid or refinanced, imposes interest costs that are frequently immovable, and must be paid.
To solve the question :
Debt- Equity Ratio = Debt / Equity
Debt = 0.58 × Equity
Let Equity = x
Debt = 0.58x
Total = $1.58x
WACC = Respective Costs × Respective Weights
10.82 = (x/1.58x × Cost of equity ) + (0.58x / 1.58x × 7.4)
10.82 = (Cost of equity / 1.58) + 2.72
Cost of Equity = (10.82-2.72) × 1.58
Cost of Equity = 12.798
= 12.8%
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