The following historical stock returns are for Companies A and B, and the Market: Company B...

 

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The following historical stock returns are for Companies A and B, and the Market: Company B Market 8.00% 18.00% 16.00% 2.00% 18.00% Year Company A 1 2 3 4 5 12.00% 16.00% 22.00% 16.00% 10.00% 8.00% 10.00% 14.00% 8.00% 10.00% Now make the following assumptions for Company A: 1. The risk-free rate is expected to be 4.0 percent, the return on the market is expected to be 16.0 percent. CAPM is the correct model of required returns for retained earnings. 2. The firm just issued 10-year bonds that pay an annual coupon of $90.00 ($45.00 every 6 months), matures for $1,000, and sold for $1,040.05835. 3. The firm can issue preferred stock at a net price of $42.00. This preferred stock pays an annual dividend of $5.25. 4. The firm's targeted capital structure is 30 percent debt. 15 percent preferred, and 55 percent equity (which can be raised through additions to retained earnings). 5. The firm's tax rate is 40.0 percent. Given this information, determine the best estimate of Company A's weighted average cost of capital (WACC). Enter your answer in decimal format to 4-decimal places. For example, if your answer is 9.55%, enter 0.0955. Question 16 A firm has a debt/equity ratio of 0.60 and a tax rate of 40.0 percent. Its equity beta is 1.20, while its asset (unlevered) beta is 0.8823. Given a risk-free rate of 6.0 percent and a return on the market of 15 percent, the equity has a required rate of return of 16.80 percent. As you can calculate, 6.0 % / 16.80% = 35.71% of the investors' required rate of return comes from the risk-free rate (compensates the investor for the time value of money). As we discussed in class, the investor is also compensated for business risk and financial risk. Given this information, determine what percentage of the investors' total required rate of return is compensation for business risk. Enter your answer is decimal format, rounded to three decimal places. For example, if your answer is 46.55%, enter "0.466". The following historical stock returns are for Companies A and B, and the Market: Company B Market 8.00% 18.00% 16.00% 2.00% 18.00% Year Company A 1 2 3 4 5 12.00% 16.00% 22.00% 16.00% 10.00% 8.00% 10.00% 14.00% 8.00% 10.00% Now make the following assumptions for Company A: 1. The risk-free rate is expected to be 4.0 percent, the return on the market is expected to be 16.0 percent. CAPM is the correct model of required returns for retained earnings. 2. The firm just issued 10-year bonds that pay an annual coupon of $90.00 ($45.00 every 6 months), matures for $1,000, and sold for $1,040.05835. 3. The firm can issue preferred stock at a net price of $42.00. This preferred stock pays an annual dividend of $5.25. 4. The firm's targeted capital structure is 30 percent debt. 15 percent preferred, and 55 percent equity (which can be raised through additions to retained earnings). 5. The firm's tax rate is 40.0 percent. Given this information, determine the best estimate of Company A's weighted average cost of capital (WACC). Enter your answer in decimal format to 4-decimal places. For example, if your answer is 9.55%, enter 0.0955. Question 16 A firm has a debt/equity ratio of 0.60 and a tax rate of 40.0 percent. Its equity beta is 1.20, while its asset (unlevered) beta is 0.8823. Given a risk-free rate of 6.0 percent and a return on the market of 15 percent, the equity has a required rate of return of 16.80 percent. As you can calculate, 6.0 % / 16.80% = 35.71% of the investors' required rate of return comes from the risk-free rate (compensates the investor for the time value of money). As we discussed in class, the investor is also compensated for business risk and financial risk. Given this information, determine what percentage of the investors' total required rate of return is compensation for business risk. Enter your answer is decimal format, rounded to three decimal places. For example, if your answer is 46.55%, enter "0.466".

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