Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of Common equity. Company estimates that its WACC is 14%. The debt is 1.5x the Internal Equity which has 40% of the total capital structure. The internal Equity consist of 15% Preferred stock , and 25% common Stock, its cost of preferred stock is 20%, before tax cost of debt is 12.5 % and tax rate is 20%. Risk free rate is rRF = 6% and the Beta factor is (bi ) = 1.75
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Suppose a company uses only debt and internal equity to finance its
capital budget and uses
Company estimates that its WACC is 14%.
The debt is 1.5x the Internal Equity which has 40% of the total capital structure.
The internal Equity consist of 15%
What is the rate of market risk premium?
Step by step
Solved in 2 steps with 2 images
