Cabana Cruise Line offers cruise ship service to various tropical locations throughout the globe. The company...

  

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Cabana Cruise Line offers cruise ship service to various tropical locations throughout the globe. The company is considering the addition of a new cruise ship to its fleet in order to expand service to new destinations by serving additional patrons. The project involves commissioning a new ship, developing destination ports to accommodate the ship, and promotion of the new destinations. The company uses its WACC as the hurdle rate to be met for new projects. However, since a new project has not been considered in some time, the WACC for the company needs to first be recalculated. Cabana Cruise Line uses a combination of debt and equity to fund operations, and they have a bond rating of A. Market capitalization consists of 12 million shares outstanding and currently trades at a value of $51 per share. Cabana Cruise Line has outstanding debt of $150 million, a default rate of 0.10%, and has a 40% tax rate. Additional information is provided in the tables below. Cost of Equity Risk Free Return Rate Market Return Company Return Beta Cost of Equity Using the data provided, 1. Apply CAPM to determine the cost of equity and the cost of debt for Cabana Cruise Line. 2. Apply WACC to determine the hurdle rate that should be used by Cabana Cruise Line. Cost of Equity= 4% 8% 10% 1.05 Cost of Debt Cost of Debt Probability of Default Debt yield to maturity Loss Rate Betal Required return of security i= risk free rate + Beta x (value of equity [return of market] - risk free rate) n=ry+ B₁x (E [Rakt] -ry Cost of Debt= 2% 5% 40% 0.95 ra = yield to maturity-probability of default x expected loss rate Cost of Equity Risk Free Return Rate Market Return Company Return Beta Cost of Equity Cost of Equity = Using the data provided, 1. Apply CAPM to determine the cost of equity and the cost of debt for Cabana Cruise Line. 2. Apply WACC to determine the hurdle rate that should be used by Cabana Cruise Line. Cost of Debt WACC 4% Cost of Debt = WACC = 8% 10% 1.05 Cost of Debt Probability of Default Debt yield to maturity Loss Rate Beta Required return of security i = risk free rate + Beta x (value of equity [return of market] -risk free rate) r₁= rf+ B₁ x (E [Rmkt] -rf 2% 5% 40% 0.95 ra = yield to maturity - probability of default x expected loss rate Rate WACC [Equity / (Equity + Debt)] x rate of equity + [Debt / (Equity + Debt)] x Rate of debt x (1-tax rate) RWACC = [E/ (E+D)] x Re + [D/ (E+ D)] x Rp x (1-RTax) Cabana Cruise Line offers cruise ship service to various tropical locations throughout the globe. The company is considering the addition of a new cruise ship to its fleet in order to expand service to new destinations by serving additional patrons. The project involves commissioning a new ship, developing destination ports to accommodate the ship, and promotion of the new destinations. The company uses its WACC as the hurdle rate to be met for new projects. However, since a new project has not been considered in some time, the WACC for the company needs to first be recalculated. Cabana Cruise Line uses a combination of debt and equity to fund operations, and they have a bond rating of A. Market capitalization consists of 12 million shares outstanding and currently trades at a value of $51 per share. Cabana Cruise Line has outstanding debt of $150 million, a default rate of 0.10%, and has a 40% tax rate. Additional information is provided in the tables below. Cost of Equity Risk Free Return Rate Market Return Company Return Beta Cost of Equity Using the data provided, 1. Apply CAPM to determine the cost of equity and the cost of debt for Cabana Cruise Line. 2. Apply WACC to determine the hurdle rate that should be used by Cabana Cruise Line. Cost of Equity= 4% 8% 10% 1.05 Cost of Debt Cost of Debt Probability of Default Debt yield to maturity Loss Rate Betal Required return of security i= risk free rate + Beta x (value of equity [return of market] - risk free rate) n=ry+ B₁x (E [Rakt] -ry Cost of Debt= 2% 5% 40% 0.95 ra = yield to maturity-probability of default x expected loss rate Cost of Equity Risk Free Return Rate Market Return Company Return Beta Cost of Equity Cost of Equity = Using the data provided, 1. Apply CAPM to determine the cost of equity and the cost of debt for Cabana Cruise Line. 2. Apply WACC to determine the hurdle rate that should be used by Cabana Cruise Line. Cost of Debt WACC 4% Cost of Debt = WACC = 8% 10% 1.05 Cost of Debt Probability of Default Debt yield to maturity Loss Rate Beta Required return of security i = risk free rate + Beta x (value of equity [return of market] -risk free rate) r₁= rf+ B₁ x (E [Rmkt] -rf 2% 5% 40% 0.95 ra = yield to maturity - probability of default x expected loss rate Rate WACC [Equity / (Equity + Debt)] x rate of equity + [Debt / (Equity + Debt)] x Rate of debt x (1-tax rate) RWACC = [E/ (E+D)] x Re + [D/ (E+ D)] x Rp x (1-RTax)

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To calculate the cost of equity using the CAPM formula well use the given values for the riskfree ra... View the full answer