Question 7 Given the following information for three publically traded comparable companies, estimate the the cost of capital for an all equity financed private company in the same industry using the average industry data from the comparable public companies. The data is also included in the exam exhibit file for convenience. Levered Company Ticker Beta Debt Equity DebUEquity Freds FRD 1.96 50.0 120.0 0.42 SOB REC Sobokawa 1.29 5.0 275.0 0.02 Reclining 1.63 115.0 533.0 0.22 BBB Corp Bond Yield 12.13% 30 Year Treas. Bond Yield 7.25% Est. Mkt. Risk Prem. 7.0%
Question 7 Given the following information for three publically traded comparable companies, estimate the the cost of capital for an all equity financed private company in the same industry using the average industry data from the comparable public companies. The data is also included in the exam exhibit file for convenience. Levered Company Ticker Beta Debt Equity DebUEquity Freds FRD 1.96 50.0 120.0 0.42 SOB REC Sobokawa 1.29 5.0 275.0 0.02 Reclining 1.63 115.0 533.0 0.22 BBB Corp Bond Yield 12.13% 30 Year Treas. Bond Yield 7.25% Est. Mkt. Risk Prem. 7.0%
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
Related questions
Question
Please send complete handwritten solution for Q7
only handwritten solution accepted
Transcribed Image Text:Question 7
Given the following information for three publically traded comparable
companies, estimate the the cost of capital for an all equity financed private
company in the same industry using the average industry data from the
comparable public companies. The data is also included in the exam exhibit file
for convenience.
Levered
Company
Ticker Beta
Debt Equity DebUEquity
Freds
FRD
1.96
50.0 120.0 0.42
SOB
REC
Sobokawa
1.29
5.0 275.0 0.02
Reclining
1.63
115.0 533.0 0.22
BBB Corp Bond Yield 12.13%
30 Year Treas. Bond Yield 7.25%
Est. Mkt. Risk Prem. 7.0%
Expert Solution
Step 1 Computation of cost of capital of FREDS
Cost of capital = Wd * Kd + We * Ke
Where
We = Weight of debt
Cost of capital = Wd* Kd + We * Ke
Wd = Weight of debt
Cost of capital = Wd * Kd + We * Ke
Kd = Cost of debt.
= I (1-t).
I = Interest
= 50 * 12.13%.
= 6.065.
T = Tax rate.
= 0.
Kd= 6.065 (1-0).
Kd = 6.065.
Step by step
Solved in 10 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education