AJT has gearing ratio (debt:(equity+debt) of 30% and pays corporation tax 25%.AJT has an asset (ungeared) beta 1.2. The risk free rate is 5% and market return 12%.
What is the cost of equity?
Please help me out.
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Cost of equity mcq
10y ago#1The gearing is 30% debt, 70% equity.
Using the asset beta formula:
1.2 = (70 / (70 + (0.75 x 30)) x equity beta
Therefore equity beta = 1.5857
Therefore the cost of equity = 5% + 1.5857 (12% - 5%) = 16.10%
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