Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:olo
3.
Canvas
Accounts payable
$10,000,000
Accruals
$9,000,000
Current liabilities
$19,000,000
Long-term debt (40,000 bonds, $1,000 par value)
Total liabilities
$40,000,000
$59,000,000
Common stock (10,000,000 shares)
Retained earnings
$50,000,000
Total shareholders' equity
$80,000,000
Total liabilities and shareholders' equity
$139,000,000
The stock is currently selling for $15.25 per share, and its noncallable $1,000.00 par value, 20-year, 9.00% bonds with semiannual payments are selling
for $930.41. The beta is 1.22, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on
the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 25%.
Refer to Exhibit 10.1. Based on the CAPM, what is the firm's cost of equity?
O 10.65%
O 11.01%
O 11.74%
O 12.10%
O 12.46%
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Transcribed Image Text:I
A,
Exhibit 10.1
Assume that
no.
have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups,
and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.
Assets
Current assets
$38,000,000
Net plant, property, and equipment
Total assets
$139,000,000
Liabilities and Equity
Accounts payable
$10,000,000
Accruals
$9,000,000
Current liabilities
$19,000,000
Long-term debt (40,000 bonds, $1,000 par value)
$40,000,000
Total liabilities
$59,000,000
Common stock (10,000,000 shares)
$30,000,000
Retained earnings
$50,000,000
Total shareholders' equity
$80,000,000
Total liabilities and shareholders' equity
$139,000,000
The stock is currently selling for $15.25 per share, and its noncallable $1,000.00 par value, 20-year, 9.00% bonds with semiannual payments are selling
for $930.41. The beta is 1.22, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on
the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 25%.
Refer to Exhibit 10.1. Based on the CAPM, what is the firm's cost of equity?
O 10.65%
O 11.01%
O 11.74%
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- The assets of company X have a beta equal to 1. Assume that the company's debt has a beta equal to 0.5 and that X's equity has a beta equal to 2. Consider an investor who holds 10% of the company's total debt liabilities and 10% of the company's equity. The beta of the investor's portfolio is equal to A) 0.1 B)1 C) 0.25 D) 1.25arrow_forward4. Rivoli Inc. hired you as a consultant to help estimate its cost of capital. You have been provided with the following data: D0 = $0.80; P 0 = $25.00; and g = 8.00% ( constant). Based on the DCF approach, what is the cost of equity from retained earnings? Do not round your intermediate calculations. a . 9.85% b. 14.32% c. 11.46% d . 9.74% e. 13.17%arrow_forward
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