Wax Engineering Inc. (WEI) has the following capital structure, which is considered to be optimal: Debt 40% Preferred stock 10% Common equity 50% 100% The risk-free rate is 7%, the market risk premium is 6%, and WEI’s beta is 1.2. The current price of the common stock is $50, its current dividend is $4.19, and they are expected to grow at 5% per year in the future. WEI’s bonds earn a return of 10%, and the risk premium on its stock over its own bond is estimated as 4%. WEI’s tax rate is 40%. WEI can obtain new capital in the following ways: · Preferred stock: New preferred stock with a dividend of $10 can be sold to the public at a price of $111.10 per share. · Debt: Debt can be sold at an interest rate of 10 percent. Determine the cost of common equity using the CAPM approach. Which answers? 13.0% 14.0% 13.8% 14.2%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Wax Engineering Inc. (WEI) has the following capital structure, which is considered to be optimal: Debt 40% Preferred stock 10% Common equity 50% 100% The risk-free rate is 7%, the market risk premium is 6%, and WEI’s beta is 1.2. The current price of the common stock is $50, its current dividend is $4.19, and they are expected to grow at 5% per year in the future. WEI’s bonds earn a return of 10%, and the risk premium on its stock over its own bond is estimated as 4%. WEI’s tax rate is 40%. WEI can obtain new capital in the following ways: · Preferred stock: New preferred stock with a dividend of $10 can be sold to the public at a price of $111.10 per share. · Debt: Debt can be sold at an interest rate of 10 percent. Determine the cost of common equity using the CAPM approach. Which answers? 13.0% 14.0% 13.8% 14.2%
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