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AJT co has a gearing ratio(debt:(Equity+debt)of 30% and pay corporation tax of 25%.AJT has an asset (ungeared) beta of 1.2.the risk free rate is 5% and the market returnis 12%.
What is the cost of equity for AJT?
Please show working.Thanks
The gearing is 70% equity and 30% debt
The asset beta = 1.2 = (70 / (70 + (0.75 x 30)) x equity beta
So equity beta = 1.2 x ((70 + (0.75 x 30))/70) = 1.586So cost of equity = 5% + (1.586 x (12% – 5%) = 16.10%
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