Firm A has common stock with a market value of $9 million and debt with a market value of $1 million. Firm A has an equity beta of 1.5. The debt is risk-free, and the company does not pay tax. The 3-year T-bill rate is 4.1% and the 10-year bond is 5.2%. The market premium above the appropriate riskless rate of return is 7.6%. a. What is the required return on Firm A's common stock? b. What is the company's cost of capital? c. What discount rate should be used to discount incremental cash flows if the company is considering expanding its current business?
Firm A has common stock with a market value of $9 million and debt with a market value of $1 million. Firm A has an equity beta of 1.5. The debt is risk-free, and the company does not pay tax. The 3-year T-bill rate is 4.1% and the 10-year bond is 5.2%. The market premium above the appropriate riskless rate of return is 7.6%. a. What is the required return on Firm A's common stock? b. What is the company's cost of capital? c. What discount rate should be used to discount incremental cash flows if the company is considering expanding its current business?
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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Transcribed Image Text:1.) Required returns and discount rates
Firm A has common stock with a market value of $9 million and debt with a market value of $1
million. Firm A has an equity beta of 1.5. The debt is risk-free, and the company does not pay
tax. The 3-year T-bill rate is 4.1% and the 10-year bond is 5.2%. The market premium above the
appropriate riskless rate of return is 7.6%.
a. What is the required return on Firm A's common stock?
b. What is the company's cost of capital?
c. What discount rate should be used to discount incremental cash flows if the company is
considering expanding its current business?
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