Assets 10million Debt 40 million Equity 60 million Interest rate on debt 10% Ris
ID: 2659530 • Letter: A
Question
Assets 10million
Debt 40 million
Equity 60 million
Interest rate on debt 10%
Risk free rate of retun 4%
Expected MArket rate 12%
Beta 1.2
Tax rate 40%
1. What is the firms pre tax cost of equity using the CAPM?
2. What is the firms after tax cost of equity using CAPM?
3. what is the firms pre tax cost of debt?
4. What is the firms after tax cost of debt?
5. What is th firms weighted cost of capital?
Explanation / Answer
ssets 10million
Debt 40 million
Equity 60 million
Interest rate on debt 10%
Risk free rate of retun 4%
Expected MArket rate 12%
Beta 1.2
Tax rate 40%
1. What is the firms pre tax cost of equity using the CAPM?
As per CAPM
Required Rate of Return of stock (pre tax cost of equity)= Rf + (Rm-Rf)*Beta
Required Rate of Return of stock (pre tax cost of equity) = 4 + (12-4)*1.2
Required Rate of Return of stock (pre tax cost of equity) = 13.60%
Required Rate of Return of stock (pre tax cost of equity) = 13.60%
2. What is the firms after tax cost of equity using CAPM?
As per CAPM
Required Rate of Return of stock (after tax cost of equity)= Rf + (Rm-Rf)*Beta
Required Rate of Return of stock (after tax cost of equity) = 4 + (12-4)*1.2
Required Rate of Return of stock (after tax cost of equity) = 13.60%
3. what is the firms pre tax cost of debt?
pre tax cost of debt = 10%
4. What is the firms after tax cost of debt?
after tax cost of debt = 10*0.60 = 6%
5. What is th firms weighted cost of capital?
weighted cost of capital = 13.60*0.60 + 6*0.40
weighted cost of capital = 10.56%