The current rate of interest on S-T Treasury Bills = 10%, intermediate term Gov. Bonds =...

 

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The current rate of interest on S-T Treasury Bills = 10%, intermediate term Gov. Bonds = 11%, Lt- Gov. Bonds = 12%, AA rate Corp. Bonds = 13.5% and the rate of inflation is 5%. Holding-period returns 1926-1982: S-T Treasury Bills = 3.5%, intermediate term Gov. Bonds = 4.0%, Long-term Gov. Bonds = 4.5%, Long-term high grade corporate bonds = 5.25%, S & P's 500 stock index = 12%, and during the period 1973 - 1982 S & P's 500 stock index rate of return was 14.5%. (Gov. = Government) (S&P = Standard and Poor's) 1. Determine the cost of equity and the cost of capital that Socal should use when it is determining the value of the free cash flows that Gulf Oil will generate. Explain each number you use in determining these rates. If you use a beta in your calculation be sure to indicate which firm's beta you are using. (20 points) The current rate of interest on S-T Treasury Bills = 10%, intermediate term Gov. Bonds = 11%, Lt- Gov. Bonds = 12%, AA rate Corp. Bonds = 13.5% and the rate of inflation is 5%. Holding-period returns 1926-1982: S-T Treasury Bills = 3.5%, intermediate term Gov. Bonds = 4.0%, Long-term Gov. Bonds = 4.5%, Long-term high grade corporate bonds = 5.25%, S & P's 500 stock index = 12%, and during the period 1973 - 1982 S & P's 500 stock index rate of return was 14.5%. (Gov. = Government) (S&P = Standard and Poor's) 1. Determine the cost of equity and the cost of capital that Socal should use when it is determining the value of the free cash flows that Gulf Oil will generate. Explain each number you use in determining these rates. If you use a beta in your calculation be sure to indicate which firm's beta you are using. (20 points)

Answer rating: 100% (QA)

To determine the cost of equity and the cost of capital for Socal when valuing the free cash flows t... View the full answer