Glassdoor Inc., has 15,00,000 equity shares outstanding. The stock sells for Rs 45 per share and has a beta of 0.90. The face value of the stock is Rs 10 and the book value is Rs 25. The market returns are 10 percent and T-bills are yielding 3.6 percent and the companys tax rate is 25 percent. The company has bonds outstanding and the YTM of bonds is 6.7% (approximately). The debt value ratio is 0.40 in the firms capital structure. 

 

(i) Calculate the cost of equity of a firm.

(ii) If the company is evaluating a new investment project having risk similar to firms

risk, what rate the firm should use to discount the projects cash flows?

(iii) Assume the company needs to raise Rs 90 lakh to start a new project. It follows the

given weightages for equity and debt. Flotation cost for equity is 6 percent and 3

percent for debt. Find the true initial cost of a new project.

 

 

(b) It is generally said that the Beta of a stock does not come out of thin air. Rather it is

determined by the characteristics of the firm. Elucidate the given statement. explain it

Answer rating: 100% (QA)

i The cost of equity of a firm can be calculated using the Capital Asset Pricing Model CAPM The formula for CAPM is Cost of Equity Riskfree rate Beta ... View the full answer