Capstone Corporation needs to raise $55 million for the MicroCHP project de- scribed in Example 11.1. Capstone's target capital structure calls for a debt ratio of 0.4, indicating that $33 million has to be financed from equity. The pertinent information is as follows: • Capstone is planning to raise $33 million from the financial markets. • Capstone's beta is known to be 2.0, which is higher than 1, indicating that the firm is perceived to be riskier than the market average. • The risk-free interest rate is 5.47%, and the average market return is 13%. (These interest rates are adjusted to reflect inflation in the economy.) • The MicroCHP project is a normal risky project comparable to the firm's mar- ket risk. Determine the cost of equity to finance the plant modernization.
Capstone Corporation needs to raise $55 million for the MicroCHP project de- scribed in Example 11.1. Capstone's target capital structure calls for a debt ratio of 0.4, indicating that $33 million has to be financed from equity. The pertinent information is as follows: • Capstone is planning to raise $33 million from the financial markets. • Capstone's beta is known to be 2.0, which is higher than 1, indicating that the firm is perceived to be riskier than the market average. • The risk-free interest rate is 5.47%, and the average market return is 13%. (These interest rates are adjusted to reflect inflation in the economy.) • The MicroCHP project is a normal risky project comparable to the firm's mar- ket risk. Determine the cost of equity to finance the plant modernization.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
For the case in Example 11. 7, suppose that Capstone decided to finance the remaining $22 million by securing a term loan and issuing 20-year $1,000 par bonds under the following conditions:
Interest
Source Amount Fraction Rate
Term loan $6.6 million 0.30 12.16% per year
Bonds $15.4 million 0.70 10.74% per year
Capstone's marginal tax rate is 40%, which is expected to remain constant in the future. Determine the after-tax cost of debt.
Transcribed Image Text:Capstone Corporation needs to raise $55 million for the MicroCHP project de-
scribed in Example 11.1. Capstone's target capital structure calls for a debt ratio
of 0.4, indicating that $33 million has to be financed from equity. The pertinent
information is as follows:
• Capstone is planning to raise $33 million from the financial markets.
• Capstone's beta is known to be 2.0, which is higher than 1, indicating that the
firm is perceived to be riskier than the market average.
• The risk-free interest rate is 5.47%, and the average market return is 13%.
(These interest rates are adjusted to reflect inflation in the economy.)
• The MicroCHP project is a normal risky project comparable to the firm's mar-
ket risk.
Determine the cost of equity to finance the plant modernization.
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