Answer:
15.22%
Explanation:
The computation of the cost of equity is shown below:
Required return on assets = Weightage of debt × pre tax cost of debt + weightage of equity × cost of equity
where,
Weightage of debt is
= (Debt) ÷ (Debt + Equity)
= (0.64) ÷ (0.64 + 1)
= 0.39
And, the weightage of equity is
= (Equity) ÷ (Debt + Equity)
= (1) ÷ (0.64 + 1)
= 0.61
Now the cost of equity is
12.6% = 0.39 × 8.5% + 0.61 × cost of equity
12.6% = 3.315% + 0.61 × cost of equity
So, the cost of equity is 15.22%
