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pearson motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. the yield to maturity on the company's outstanding bonds is 8%, and its tax rate is 40%. pearson's cfo estimates that the company's wacc is 11.50%. what is pearson's cost of common equity? do not round intermediate calculations. round your answer to two decimal places.



Answer :

anshumanaryan799

Pearsons's cost of common equity is :- 0% Debt; 60% Common equity; rd = 9%; T = 40%; WACC = 13.40%; rs =?

WACC= wdrd(1 - T) + wcrs

0.1340 = 0.40(0.09)(1 - 0.4) + 0.60rs

0.1340 = 0.0216 + 0.60rs

0.1124 = 0.60rs

rs = 18.73%

Common equity is the number that every common shareholder has invested within a very company. Most importantly, this includes the worth of the common shares themselves. However, it additionally includes retained earnings and further paid-in capital. Under the new Basel IIIbanking agreement giant internationally active banks are getting to be needed to carry a minimum of 4.5% of their risk-adjusted assets in common equity. This regulation is to be absolutely effective as of one Jan 2019.

In the United States, the Federal Reserve has determined that all banks can get to adhere to the standard, with the most important banks needing to hold an additional buffer.

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