What is the estimated cost of equity for Company A?

CORRECT TEXT

Company A is unlisted and all-equity financed. It is trying to estimate its cost of equity.

The following information relates to another company, Company B, which operates in the same industry as Company A and has similar business risk:

Equity beta = 1.6

Debt:equity ratio 40:60

The rate of corporate income tax is 20%.

The expected premium on the market portfolio is 7% and the risk-free rate is 5%.

What is the estimated cost of equity for Company A?

Give your answer to one decimal place.

? %

View Answer

Answer: 12.3, 12.30