Answered: what is the cost of equity if the risk…

Business

Finance

what is the cost of equity if the risk adjusted discount rate is 16%, the risk free rate is 7% and the beta is 1.8?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 7P

See similar textbooks

Related questions

Q: Current Capitalization (Millions of USD) Currency Million USD Shares Price $ 10.7 Shares Outstanding…

A: The main objective of the company would be to maximizing the shareholder's value. That would be…

Q: The current value of a firm is $1,400. Te firm has $1,000 in pure debt due in one year and the…

A: Bonds are debts instruments that are issued by entities to raise funds and meet their capital…

Q: year risk premium is estimated to be 4.8%. mate the equity cost of capital for Mackenzie. er the…

A: Dividend discount model is used to make valuation of stock based on dividend and growth of dividend…

Q: You have the following initial information on which to base your calculations and discussion:…

A: If there is no component of debt in firm’s capital, it is known as unlevered capital. But when the…

Q: Mackenzie Company has a price of $34 and will issue a dividend of $2.00 next year. It has a beta of…

A: The cost of equity can be computed using the CAPM model which uses a single factor which is the…

Q: Your firm has a target debt ratio of 30%. Cost of debt (RB) is 6%. The risk-free rate is 3% and the…

A: Target debt ratio = 30% Cost of debt = 6% Risk free rate = 3% Expected market risk premium = 6%…

Q: Subject: Financial strategy & policy Question No 4…

A: Capital Asset Pricing Model: It is a model that is used to explain the association between…

Q: A firm has expected EBIT of $910, debt with a face and market value of $2,000 paying an 8.5% annual…

A: Variables in the question:EBIT=$910Face value and market value of debt=$2000Unlevered cost of…

Q: Assume a firm is financed with $7500 debt and $2500 equity. The beta of the equity is 1.1. The…

A: cost of equity = Risk free rate + beta * Market risk premium

Q: Your firm has a target debt ratio of 30%. Cost of debt (Rb) is 6%. The risk-free rate is 3% and the…

A: Fist we need to calculate cost of equity by using CAPM model. Cost of equity =Risk free rate…

Q: If the financial Manager of Evergreen wants to decrease its cost of capital by adding more debt to…

A: Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…

Q: Company needs ghc1000 to finance its activities. The firm can finance this expenditure either by…

A: Given Information: Funds required by the company for its activities - ghc1000 Finance can be done…

Q: Mackenzie Company has a price of $33 and will issue a dividend of $2.00 next year. It has a beta of…

A: Dividends are a part of net income that is paid to the shareholder of the company in the form of a…

Q: Heleveton Industries is 100% equity financed. Its current beta is 1.1. The expected market risk…

A: here we will use the Cost of capital formula to calculate the capital structure Cost of capital =…

Q: Suppose Riggley Corp. has a capital structure of 40% equity and 60% debt with the following…

A: Weight of equity = we = 40% Weight of debt = wd = 60% Beta = b = 0.7 Market Risk premium = mrp = 5%…

Q: Quantitative Problem: Barton Industries estimates its cost of common equity by using three…

A: CAPM cost of equity = risk free rate+ beta *market risk premium = 4.4% + 1.3*5.9% = 12.07% Bond…

Q: A company needed ghc 1000 to finance its activities. The firm can financed this expenditure either…

A: Workings:: A:: 100% equity financing Equity portion…

Q: Suppose Mechis Technologies has a capital structure of 40% equity and 60% debt with the following…

Q: equityholders at date 1? What kind of financial product has the same payoffs? Please describe the…

A: a)At date 1 ,two possible values are possible: 100*120%=120 or 100*90%=90 d=downmove=0.9 and upmove…

Q: Quantitative Problem: Barton Industries estimates its cost of common equity by using three…

A: The rate of return that is expected by investors on their equity investment is term as the cost of…

Q: Assume a firm is financed with $1000 debt that has a market beta of 0.4 and $3000 equity. The risk…

A: The expected return on debt is the effective market rate of interest at the time of the issue of the…

Q: A company’s equity is valued at $10 million and debt is valued at $2 million. Its bonds trade at the…

A: The capital assets pricing model is a technique that helps to compute the expected return on the…

Q: Estimate your firm's Weighted Average Cost of Capital. Assume that the current risk-free rate of…

A: Weighted average cost of capital(WACC) is the average cost of capital, which can be calculated by…

Q: Estimate your firm’s Weighted Average Cost of Capital. Assume that the current risk-free rate of…

A: Given information: Risk free rate of interest is 3.5% Risk premium is 5% Corporate tax rate is 21%

Q: Mackenzie Company has a price of $31 and will issue a dividend of $2.00 next year. It has a beta of…

A: Equity refers to that portion of the capital that is funded by the owners of the company. The cost…

Q: Mackenzie Company has a price of $38 and will issue a dividend of $2.00 next year. It has a beta of…

A: Current Price (Po) =$38 Dividend for next year (D1) = $2.00 Beta = 1.3 Risk Free Rate (Rf) = 5.3%…

Q: you have a capital structure consisting of 30% debt and 70% equity. There is an 8% yield to…

A: Debt = 30% Equity = 70% YTM = 8% Risk Free Rate = 5% Market Risk Premium = 6% Cost of Equity = 12.5%…

Q: Ganade and Equity Risk Premiums. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the…

A: CAPM and ICAPM are two important models in finance that are used to understand and quantify the…

Q: Consider a two-date binomial model. A company has both debt and equity in its capital structure. The…

A: Please find the answers to the above questions below:

Q: Mackenzie Company has a price of $37 and will issue a dividend of $2.00 next year. It has a beta of…

A: Using CAPM

Q: Suppose the Machine Corp. has a capital structure of 80% equity and 20% debt with the following…

A: Weight of equity = we = 80% Weight of debt = wd = 20% Beta = b = 1.3 Market Risk premium = mrp = 10%…

Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

-what is the cost of equity if the risk adjusted discount rate is 16%, the risk free rate is 7% and the beta is 1.8?

-what is rhe cost of debt of a bond that has a current price of $875, floatation costs of 10% of the gross price, matures in 10 years and has a coupon rate of 5.5% the firm is in the 35% tax bracket

Definition Definition Amount of return a company generally pays to its equity investors. The cost of equity represents the compensation required by the market in lieu of owning the asset firm and simultaneously bearing the risk of ownership.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step by step

Solved in 4 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

A company needs ghc1000 to finance its activities. The firm can finance this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghe 160 in good years and ghc80 in bad years. Assuming the firm faces one-quarter probability of good years; What will be the stream of returns on both bonds and equity if the company chooses the following financing options? i. a. 100% equity financing ii. 50% equity financing iii. 20% equity financing iv. 0% equity financing Estimate the equity risk associated with each option in (a) As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why? b. C.
A firm has outstanding debt with a coupon rate of 7%, ten years maturity, and a price of $1,000. What is the after-tax cost of debt if the marginal tax rate of the firm is 25%? OA) 4.7% B) 5.5% C) 4.2% D) 5.3%
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What are the possible payoffs to the equityholders at date 1? What kind of financial product has the same payoffs? Please describe the detailed characteristics of the financial product. b. What are the possible payoffs to the bondholders at date 1? Are they riskfree? What kind of financial product/portfolio has the same payoffs? Please describe the detailed characteristics of the financial product/portfolio.
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What is the value of the debt at Date 0? What is the value of the equity at Date 0? b. Suppose the government announces that it guarantees the company’s payment to the debtholders. How much is the government guarantee worth?
which one is correct please confirm? QUESTION 5 Heleveton Industries is 100% equity financed. Its current beta is 1.1. The expected market risk premium is 8.5%, and the risk-free rate is 4.2%. If Heleveton changes its capital structure to 25% debt, it estimates its beta will increase to 1.2. If the after-tax cost of debt will be 6%, should Heleveton make the capital structure change? a. Yes, cost of capital decreases 1.67% b. No, cost of capital increases by 0.85% c. Yes, cost of capital decreases by 2.52% d. No, stock price would decrease due to increased risk
A firm has outstanding debt with a coupon rate of 8%, nine years maturity, and a price of $1,000 (which is the face value of the debt). What is the after-tax cost of debt if the marginal tax rate of the firm is 40%? A) 3.8% B) 4.8% C) 4.3% D) 4.4%
Your firm has a target debt ratio of 30%. Cost of debt (RB) is 6%. The risk-free rate is 3% and the expected market risk premium is 6%. Your firm's unlevered (asset) beta is 1. What is the appropriate rate to discount the interest tax shields associated with your debt? 10.00% 11.57% 6.00% 9.00% 4.00%
A company’s equity is valued at $10 million and debt is valued at $2 million. Its bonds tradeat the risk-free rate of 2%. If its WACC is 12.2% and its CAPM equity beta is 0.8, what must be theexpected rate of return on market portfolio? Assume that tax rate is 40%.
The current value of a firm is $1,400. Te firm has $1,000 in pure debt due in one year and the risk-free rate is 6%. The firm's asset will be worth either $1,200 or $1,500 in one year. What is the interest rate on the debt? A. 6.0% B. 7.0% C. 7.5% D. 11.0% E. 13.0%
The coupon rate on a debt issue is 6%. If the yield to maturity on the debt is 9%, what is the after-tax cost of debt in the weighted average cost of capital if the firm's tax rate is 21%?
Vinay
Your firm has a target debt ratio of 30%. Cost of debt (Rb) is 6%. The risk-free rate is 3% and the expected market risk premium is 6%. Your firm's unlevered (asset) beta is 1. What is the appropriate rate to discount the interest tax shields associated with your debt? Only typed answer