Gilbert and Sons is a leveraged firm, it has 300,000 shares of stock outstanding with a market price of $32 per share. the company also has 6.6 million of debt outstanding that sells at par. the pre-tax cost of debt is 9% and the unlevered cost of capital is 12%. what is the cost of equity if the tax rate is 35 percent?

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Asked Nov 7, 2019
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Gilbert and Sons is a leveraged firm, it has 300,000 shares of stock outstanding with a market price of $32 per share. the company also has 6.6 million of debt outstanding that sells at par. the pre-tax cost of debt is 9% and the unlevered cost of capital is 12%. what is the cost of equity if the tax rate is 35 percent?

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Step 1

Computation of debt-equity ratio:

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A В Particulars Amount 1 2 Outstanding mumber of shares Price per share 4 Equity value 300,000 32 9600000 5 Debt vahue 6600000 Debt-equity ratio 7 Unlevered equity cost 8 Debt cost 0.6875 12% 9%

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Step 2

Working note:

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A B Particulars Amount 1 Outstanding number of shares 300000 32 =B2*B3 6600000 =B5/B4 0.12 0.09 3 Price per share 4 Equity value 5 Debt value 6 Debt-equity ratio 7 Unlevered equity cost 8 Debt cost

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