GD has a target capital structure of 40% debt and the 60% equity. The

QUESTION

GD has a target capital structure of 40% debt and the 60% equity. The yield to maturity on the companys outstanding bonds is 9% and the companys tax rate is 40%. GDs CFO has calculated the companys WACC as 9.96%. What is the companys cost of equity capital?
9.96% = 40%*9%*60% 60% times the cost of equity capital (40%*9%*60% is the bonds, the 60% comes in because its tax deductible, tax rate is 40%, so after tax cost is 60%) so 0.0996 = 0.4*0.09*0.6 0.60 times the cost of equity capital 0.0996 = 0.0216 0.60

es the cost of equity capital 0.078 = 0.60 times the cost of equity capital divide both sides by 0.6, 0.13 = the cost of equity capital or the cost of equity capital is 13%

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