Scenario: A privately held corporation wishes to estimate its cost of equity. The firm has a target debt-to-equity ratio of 0.5 and the marginal tax rate is 35%. The yield on 10 year U.S. Treasury securities is 4% and the expected market risk premium is 6%. It has identified 3 pure play firms with the following equity betas and debt-to-equity rations:
Firm ........... Beta ......... D/E Ratio
A ................ 1.8 ............ 0.6
B ................ 1.2 ............ 0.4
C ................ 2.1 ............ 0.8
What is the cost of equity for the privately held corporation?