Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of Common equity. Company estimates that its WACC is 14%. The debt is 1.5x the Internal Equity which has 40% of the total capital structure. The internal Equity consist of 15% Preferred stock , and 25% common Stock, its cost of preferred stock is 20%, before tax cost of debt is 12.5 % and tax rate is 20%. Risk free rate is rRF = 6% and the Beta factor is (bi ) = 1.75

Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of Common equity. Company estimates that its WACC is 14%. The debt is 1.5x the Internal Equity which has 40% of the total capital structure. The internal Equity consist of 15% Preferred stock , and 25% common Stock, its cost of preferred stock is 20%, before tax cost of debt is 12.5 % and tax rate is 20%. Risk free rate is rRF = 6% and the Beta factor is (bi ) = 1.75

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 8P

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