Michalko Corp. Total Assets $14,680 Interest-Bearing Debt $8,124 Average borrowi
ID: 2625798 • Letter: M
Question
Michalko Corp.
Total Assets
$14,680
Interest-Bearing Debt
$8,124
Average borrowing rate for debt
11.5%
Common Equity:
Book Value
$5,120
Market Value
$25,700
Marginal Income Tax Rate
37%
Market Equity Beta
1.44
Using the information in the table and assuming that the risk-free rate is 4.2% and the market risk premium is 6.2% calculate Michalko's cost of equity capital, using the capital asset pricing model. Please explain and show work.
a. 10.4%
b. 8.9%
c. 6.2%
d. 13.1%
Michalko Corp.
Total Assets
$14,680
Interest-Bearing Debt
$8,124
Average borrowing rate for debt
11.5%
Common Equity:
Book Value
$5,120
Market Value
$25,700
Marginal Income Tax Rate
37%
Market Equity Beta
1.44
Explanation / Answer
Ans: d. 13.1%
According to CAPM equation:
Cost of equity capital = Risk-free rate + Market Equity Beta * Market Risk Premium
= 4.2% + 1.44 * 6.2%
= 13.128% (approximately 13.1%)