Cost of equity mcq

This topic has 1 reply, 2 voices, and was last updated 10 years ago by John Moffat.

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November 16, 2015 at 5:17 pm #282941
Hafsa
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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.
November 16, 2015 at 8:45 pm #283139
John Moffat
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The 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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