Compute the cost of equity

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Suppose that computer manufacturer ABC Inc. has five year bonds outstanding that trade in the market at $101.25 for every $100 face value. The bonds pay semiannual interest of 3% of face value. ABC also reported a return on equity of 14% last year, and expects it to be at this level for the next several years. The return on assets was 10%. Using market values, debt constitutes 40% of the overall value of ABC. The tax rate is 35%, beta is 1.25, the risk free rate is 5% and the market risk premium is 7%. Compute the cost of equity, the cost of debt and the WACC.

Reference no: EM131710210

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