Answer:
rE = 0.104 or 10.4%
Explanation:
The WACC or weighted average cost of capital is the cost of a firm's capital structure. The capital structure can consist of one or more of the following components namely debt, preferred stock and common equity. The WACC is calculated as follows,
WACC = wD * rD * (1 - tax rate) + wP * rP + wE * rE
Where,
- w represents the weight of each component
- r represents the cost of each component
- D, P and E represents debt, preferred stock and common equity
- rD * (1 - tax rate) is the after tax cost of debt
plugging in the available values for wD, wE, tax rate, rD and WACC in the formula above, we can calculate the cost of common equity to be,
0.096 = 0.4 * 0.12 * (1 - 0.3) + 0.6 * rE
0.096 = 0.0336 + 0.6 * rE
0.096 - 0.0336 = 0.6 * rE
0.0624 / 0.6 = rE
rE = 0.104 or 10.4%
