Determine the cost of equity, Accounting Basics

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Determine the cost of equity

SocksOnline is an Internet company that sells socks online. If the risk-free rate is 4.2% and the market risk premium is 7.1% answer the following questions:

a. The company has a beta of 1.6 and no debt. What is the cost of equity?

b. If the company decides to use 40% debt what is the new cost of equity? Note, the company's marginal tax rate is 35%. (Hint: calculate the levered beta and then re-calculate the cost of equity with that.)

c. Why is the cost of equity higher when debt is used?

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Accounting Basics: Determine the cost of equity

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Accounting Basics: Determine the cost of equity

Reference No:- TGS052286

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Recent Questions Asked Accounting Basics

Q : Target debt ratio of meyer inc

Q : What is the current price of the common stock

Q : Maintaining the current selling price per unit

Q : Expected year-end dividend

Q : Determine the cost of equity

Q : Perpetual method for recording merchandise transactions

Q : Net working capital and expenses

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Request for Solution File

Ask an Expert for Answer!!

Accounting Basics: Determine the cost of equity

Reference No:- TGS052286

Recent Questions Asked Accounting Basics

Q : Target debt ratio of meyer inc

Q : What is the current price of the common stock

Q : Maintaining the current selling price per unit

Q : Expected year-end dividend

Q : Determine the cost of equity

Q : Perpetual method for recording merchandise transactions

Q : Net working capital and expenses

Q : Copper distributions land to kathryn

Q : Determining the substantial financial leverage

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