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James is considering investing in textile industry of a country Y.
In country Y .. Riskfree= 8% .. returnon market = 15%
James debt ÷ equity is 140%Jason,a 100% equity financed is also texrile industry in country Y with beta factor 1.2
Both companies taxed at 30%
What is the cost of equity of James?
I have no idea because you have not said what the beta of James’s equity is.
I assume that what you are really asking is what is the ‘project specific cost of equity’ (i.e. the cost of equity applicable when appraising the investment in Jason (which is not what you have asked in your question)!
The answer is 24.63%
asset beta = 1.2
1.2 = (100/((100 + (140×0.7))) x equity beta
equity beta = 2.376
Project specific cost of equity = 8 + 2.376 (15 – 8) = 24.63%Have you watched my free lectures on this?
You really should be spending your time practicing every question in your Revision Kit – they have answers with workings – and then asking about anything in the answers that you are not clear about.
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