Malik Brothers has a stock price of $45. In the fiscal year just ended, dividends were $2.00. Earnings per share and dividends are expected to increase at an annual rate of 9 percent. The risk-free rate is 5 percent, the market risk premium is 6.4 percent and the beta on Malik’s stock is 1.25. Malik’s target capital structure is 40% debt and 60% common equity. Malik’s tax rate is 40 percent. New common stock can be sold to net $35 per share after flotation costs. Delta can sell bonds that mature in 25 years with a par value of $1,000 and an 8% coupon rate paid annually for $960. Calculate the required return on the firm’s stock using CAPM.

Malik Brothers has a stock price of $45. In the fiscal year just ended, dividends were $2.00. Earnings per share and dividends are expected to increase at an annual rate of 9 percent. The risk-free rate is 5 percent, the market risk premium is 6.4 percent and the beta on Malik’s stock is 1.25. Malik’s target capital structure is 40% debt and 60% common equity. Malik’s tax rate is 40 percent. New common stock can be sold to net $35 per share after flotation costs. Delta can sell bonds that mature in 25 years with a par value of $1,000 and an 8% coupon rate paid annually for $960. Calculate the required return on the firm’s stock using CAPM.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 7P

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Q. Malik Brothers has a stock price of $45. In the fiscal year just ended, dividends were $2.00. Earnings per share and dividends are expected to increase at an annual rate of 9 percent. The risk-free rate is 5 percent, the market risk premium is 6.4 percent and the beta on Malik’s stock is 1.25. Malik’s target capital structure is 40% debt and 60% common equity. Malik’s tax rate is 40 percent. New common stock can be sold to net $35 per share after flotation costs. Delta can sell bonds that mature in 25 years with a par value of $1,000 and an 8% coupon rate paid annually for $960. Calculate the required return on the firm’s stock using the discounted cash flow approach.
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