ABC has 2.5 million shares of common stock with a current price of $4 per share, and

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ABC has 2.5 million shares of common stock with a current price of $4 per share, and the total value of its debt is $6 million. The finance director of ABC estimates that the equity beta is currently 1.2 and the expected market risk premium is 5%. The risk-free treasury bill rate is 4%. Assume for simplicity that ABC's debt is risk-free and that the company does not pay corporate taxes.

(a) Estimate the company's weighted average cost of capital.

(b) What is the appropriate discount rate for an expansion of the company's present business?

(c) If ABC were a privately held family firm, would its owners have any misgivings about using CAPM in assessing ABC's cost of capital? Why?

Posted Date: May 19, 2024 05:14 PM

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ABC has 2.5 million shares of common stock with a current price of $4 per share, and

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