ABC Telecom is considering a project fro the coming year, which will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment.

* Issue 15 million of 20 year bonds at a price of 101, with a coupon rate of 8 percent, and flotation costs of 2 percent of par.

* Use 35 million of funds generated from (retained) earnings

The equity market is expected to earn ABC is estimated to be 0.60. ABC is subject to an effective corporate income tax rate of 40 percent. Assume that after-tax cost of debt is 7 percent and the cost of equity is 12 percent. Determine the weighted average cost of capital.

Compute ABC's expected rate of return using the Capital Asset Pricing Model (CAPM).

A. 12.20 percent

B. 9.20 percent

C. 7.20 percent

D. 10.0 percent

Answer rating: 100% (QA)

Using CAPM K o K e W e K d W d here K o Expec... View the full answer