In the table below (in $000) a shortened balance sheet of a company is presented: Assets...

 

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In the table below (in $000) a shortened balance sheet of a company is presented: Assets Debt and equity 400 1 800 400 Total 2 600 2 600 There are 120 000 shares outstanding and their current market price is $5. a) Compute the cost of equity if coefficient beta is 1.4, the risk-free rate is 4% and the market risk premium is 10%. b) What is the weighted average cost of capital of the company, if the cost of debt is 9% and the tax rate is 30%? Current assets Fixed assets 500 2 100 Short-term liabilities. Long-term liabilities Equity Total In the table below (in $000) a shortened balance sheet of a company is presented: Assets Debt and equity 400 1 800 400 Total 2 600 2 600 There are 120 000 shares outstanding and their current market price is $5. a) Compute the cost of equity if coefficient beta is 1.4, the risk-free rate is 4% and the market risk premium is 10%. b) What is the weighted average cost of capital of the company, if the cost of debt is 9% and the tax rate is 30%? Current assets Fixed assets 500 2 100 Short-term liabilities. Long-term liabilities Equity Total

Answer rating: 100% (QA)

SOLUTION a To compute the cost of equity we can use the Capital Asset Pricing Model CAPM formula Cost of Equity RiskFree Rate Beta Market Risk Premium ... View the full answer