McGraw Hill publishers have 200,000 shares of common stock outstanding with a par value of £1.00 per share. The current share price is £4 per share. The firm has outstanding debt with a par value of £0.6 million, which is selling at 75% of par. The risk-free rate of interest is 5% and the required return on the firm’s debt is 10%. The risk premium on the market is 8% and the firm has an equity beta of 1.5. The corporation tax rate is 20%. Assume that debt payments are tax deductible. What is McGraw Hill’s (i) cost of equity capital and (ii) WACC? a.None of the above b. (i) 13.6% and (ii) 13.76% c. (i) 17% and (ii) 11.58% d. (i) 13.6% and (ii) 11.58% e. (i) 17% and (ii) 13.76%
McGraw Hill publishers have 200,000 shares of common stock outstanding with a par value of £1.00 per share. The current share price is £4 per share. The firm has outstanding debt with a par value of £0.6 million, which is selling at 75% of par. The risk-free rate of interest is 5% and the required return on the firm’s debt is 10%. The risk premium on the market is 8% and the firm has an equity beta of 1.5. The corporation tax rate is 20%. Assume that debt payments are tax deductible. What is McGraw Hill’s (i) cost of equity capital and (ii) WACC? a.None of the above b. (i) 13.6% and (ii) 13.76% c. (i) 17% and (ii) 11.58% d. (i) 13.6% and (ii) 11.58% e. (i) 17% and (ii) 13.76%
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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McGraw Hill publishers have 200,000 shares of common stock outstanding with a par value of £1.00 per share. The current share price is £4 per share. The firm has outstanding debt with a par value of £0.6 million, which is selling at 75% of par. The risk-free rate of interest is 5% and the required return on the firm’s debt is 10%. The risk premium on the market is 8% and the firm has an equity beta of 1.5. The corporation tax rate is 20%. Assume that debt payments are tax deductible. What is McGraw Hill’s (i)
a.None of the above
b.
(i) 13.6% and (ii) 13.76%
c.
(i) 17% and (ii) 11.58%
d.
(i) 13.6% and (ii) 11.58%
e.
(i) 17% and (ii) 13.76%
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