le 5 Homework ssignment: Module 5 Homework A..ignment Score 000% ave Submit Assi

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le 5 Homework ssignment: Module 5 Homework A..ignment Score 000% ave Submit Assignment for Grading Questions Problem 10.03 Question 3 of20 Check My Work (3 remaining) Ol Click here to read the eBook: The Cost of Retained Earnings, rs COST OF COMMON EQUITY Pearson Motors has a target capital structure of 35% debt and 65% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 10%, and its tax rate is 40%. Pearson's CFO estimates that the company's WACC is 13.00%, what is Pearson's cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places o 10. 12. 13. Check My Work (3 remaining) esc 20 F2 2 4

Explanation / Answer

Answer: 16.77%

Explanation:

WACC = (We * Ke) + Wd * Kd * (1 – Tax rate) We = Weight of Equity Ke = Cost of Equity Wd = Weight of debt Kd = Cost of debt Substution og given values 0.13 = (0.65*Ke)+ 0.35*0.1*(1-0.40) 0.13 = (0.65*Ke)+ 0.021 0.65*Ke = 0.13-0.021 0.65*Ke = 0.109 Ke = 0.109/0.65 Ke = 0.1677 ~ 16.77%

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