Question

Asked Nov 20, 2019

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What is the company’s cost of capital?

1. CAPM = rrf + (rm – rrf)B = required rate of return on equity

r rf = risk-free rate of return = 10-year Treasury rate = 3%

S&P market premium (in parenthesis) is the extra return to cover risk offered in the stock market = 5%. B = Beta of company = 1.2

2. WACC = wdrd(1-t) + were = weighted average cost of capital

Weights of debt and equity: Given debt ratio, that is, debt to total assets = 28%. Cost of debt is bond rating at high end of A average = 6%. Tax rate given 40%.

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Step 1

**1.**

Risk-Free Rate (rrf) = 3% or 0.03

Market Premium (rm – rrf) = 5% or 0.05

Beta (B) = 1.2

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