Answer:
The calculated value of the company's cost of equity capital is option D. 22.73%.
Explanation:
The weighted average cost of capital (i.e. 18.6%) is given by:
= (Proportion of debt * pretax cost of debt * (1 - tax rate)) + (proportion of equity * cost of equity)
= (0.25 * 9.4% * (1 - 34%)) + (0.75 * cost of equity)
= 1.551% + (0.75 * cost of equity)
On rearranging the above equation we get, cost of equity:
=
(
18.6
%
−
1.551
%
)
0.75
=
17.049
%
0.75
= 22.73%
