Estimate the cost of equity

Using the data given below estimate cost of capital.

Beta = 1.2, Rf = 12.15 percent, market premium = 10 percent. The company has stated that it intends to maintain a debt to value ratio of 0.40. The yield on the company’s bonds is 13.5 percent. The company’s marginal tax rate is 35 percent.

You are in the process of coming out with a public issue. So you are interested in cost of equity. This is the first public issue. So there is no stock market history for your company. How would you estimate the cost of equity if:

• There are comparable firms.

• There are no comparable firms in the country.

Solution: