Suppose a firm has a beta of 1.5. The market risk premium is expected to be...

 

Transcribed Image Text:

Suppose a firm has a beta of 1.5. The market risk premium is expected to be 9%, and the current risk-free rate is 6%. We have used analysts' estimates to determine that the market believes dividends will grow at 6% per year and our last dividend was $2. The stock is currently selling for $15.65. The bonds of the company have a face value of $1000 per bond and mature in 13 years and pay 8% annually. These bonds are currently selling for $969.08 The firm maintains a capital structure of 55% equity and 45% debt. The tax rate is 35%. What is the cost of equity? (The answer should be the same for both methods) What is the cost of debt? What is the WACC? Suppose a firm has a beta of 1.5. The market risk premium is expected to be 9%, and the current risk-free rate is 6%. We have used analysts' estimates to determine that the market believes dividends will grow at 6% per year and our last dividend was $2. The stock is currently selling for $15.65. The bonds of the company have a face value of $1000 per bond and mature in 13 years and pay 8% annually. These bonds are currently selling for $969.08 The firm maintains a capital structure of 55% equity and 45% debt. The tax rate is 35%. What is the cost of equity? (The answer should be the same for both methods) What is the cost of debt? What is the WACC?

Answer rating: 100% (QA)

To calculate the cost of equity using the Capital Asset Pricing Model CAPM we can use the formula Co... View the full answer