Quantix Corp has shares with a beta of 1.3. The risk free rate is 3% and the exp
ID: 2779252 • Letter: Q
Question
Quantix Corp has shares with a beta of 1.3. The risk free rate is 3% and the expected market return is 9%. Its tax rate is 30%. The company's shares currently trade for $45 a share. What is the company's estimated cost of retained earnings?
10.8%
7.56%
14.7%
9.00%
A company has target weights of debt, preferred and common equity of 20%, 10% and 70%, respectively. It has liquidation values of debt, preferred and common equity of 30%, 15% and 55%. Its book values of debt, preferred and common equity are 40%, 10% and 50%. The estimated costs, net of adjustments, to the issuer are 5%, 9% and 12% for debt, preferred and common equity. Estimate the firm's weighted average cost of capital.
a.10.8%
b.7.56%
c.14.7%
d.9.00%
Explanation / Answer
1)
Cost of common stock and cost of retained earnings is same.
Cost of retained earnings = Rf+×Rp
Rf is risk free return
Rp is risk premium
= 3%+1.3×(9%-3%)
= 10.8%