Steel Company. is financed with common equity, preferred equity, and long-term debt.  The firm is considering replacing all of the machinery in its Louisiana plant.  They have more than enough cash on hand to pay for the project without raising external capital. Some relevant information about the firm is given below. 

Common share price (per share)	$35
Number of common shares outstanding	2M
Preferred share price (per share)	$8
Number of preferred shares outstanding	10M
Book Value of Total Debt outstanding	75M
Market Value of Total Debt outstanding	50M
Equity beta (for common stock)	1.4
Preferred Equity beta	0.6
Risk-free rate	4.5%
Historical return on the S&P 500	12.0%
Dividends per share on common stock	$0.00
Dividends per share on preferred stock	$1.00
IRR on machinery replacement at its Pittsburg plant	18%
Yield to maturity on the firm's long term debt	8%
The coupon rate on the firm's long term debt	6.0%
P/E ratio of the firm	16.5
Corporate tax rate	35%

 

 

1) According to CAPM, what is the expected rate of return for common equity holders?

2) What is the expected rate of return for debt holders?

3)What is the cost of capital (WACC) that the firm should use to evaluate the project?

Answer rating: 100% (QA)

According to the CAPM the expected rate of return for common equity holders is rE rf Erm rf where rf ... View the full answer