Pearson Motors has a target capital structure of 30% debt and70% common equity, with no preferred stock. The yield to maturity on the company’s outstandingbonds is 9%, and its tax rate is 40%. Pearson’s CFO estimates that the company’sWACC is 10.50%. What is Pearson’s cost of common equity?

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Pearson Motors has a target capital structure of 30% debt and
70% common equity, with no preferred stock. The yield to maturity on the company’s outstanding
bonds is 9%, and its tax rate is 40%. Pearson’s CFO estimates that the company’s
WACC is 10.50%. What is Pearson’s cost of common equity?

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