The following financial statement data pertains to ABC Company (dollar amounts in millions): Total Assets .........$145,782 Interest-Bearing
Question:
The following financial statement data pertains to ABC Company (dollar amounts in millions):
Total Assets .........$145,782
Interest-Bearing Debt ...... $32,659
Average Pre-tax borrowing cost... 8.25%
Common Equity:
Book Value ........ $22,515
Market Value ........ $65,843
Income Tax Rate ........ 40%
Market Equity Beta ....... 0.85
Market Premium ........ 7.5%
Risk-free interest rate ....... 2.2%
Required:
a. Calculate the company's cost of equity capital using CAPM.
b. Calculate the weight on debt capital that should be used to determine ABC’s weighted-average cost of capital.
c. Calculate the weight on equity capital that should be used to determine ABC’s weighted-average cost of capital.
d. Calculate ABC’s weighted-average cost of capital.
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...
Step by Step Answer:
A Computation of the companys cost of equity capital Using CAM Formula Cost of equity capital Rf RmR...View the full answer
