Apel Investment Company has GH¢1,800,000 of interest-bearing bond outstanding. The outstanding bonds have a 11% coupon and a 14% yield to maturity. Management believes they could issue new bonds at a premium of 105% that would provide a similar yield to maturity. Also, the company’s prepared stock currently stands at GH¢1,200,000 and trades at GH¢60.00 per share. The company pays a dividend of GH¢3.00 per share. Furthermore, the company’s common stock sells for GH¢15.00 per share with 200,000 shares in issue. The company has a beta of 1.2, whiles the government’s T-Bill has an interest rate of 12%, with a 18% average return on the market. The company’s marginal tax rate is 40%. Management is considering investing in a new project, the details of which are as follows: GH¢ Project cost 2,000,000.00 Estimated net profit: Year 1 (22,000.00) Year 2 192,000.00 Year 3 300,000.00 Year 4 270,000.00 Year 5 180,000.00 Additional information; Depreciation is based on the straight line method. The estimated residual value of the project at the end of its useful life is GH¢400,000 calculate the cost of equity using the capital asset pricing model
Apel Investment Company has GH¢1,800,000 of interest-bearing bond outstanding. The
outstanding bonds have a 11% coupon and a 14% yield to maturity. Management believes
they could issue new bonds at a premium of 105% that would provide a similar yield to
maturity. Also, the company’s prepared stock currently stands at GH¢1,200,000 and trades
at GH¢60.00 per share. The company pays a dividend of GH¢3.00 per share. Furthermore,
the company’s common stock sells for GH¢15.00 per share with 200,000 shares in issue.
The company has a beta of 1.2, whiles the government’s T-Bill has an interest rate of 12%,
with a 18% average return on the market. The company’s marginal tax rate is 40%.
Management is considering investing in a new project, the details of which are as follows:
GH¢
Project cost 2,000,000.00
Estimated net profit:
Year 1 (22,000.00)
Year 2 192,000.00
Year 3 300,000.00
Year 4 270,000.00
Year 5 180,000.00
Additional information;
The estimated residual value of the project at the end of its useful life is
GH¢400,000
calculate the
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