1) Stock in Country Road Industries has a beta of 1.23. The market risk premium
ID: 2623579 • Letter: 1
Question
1)
Stock in Country Road Industries has a beta of 1.23. The market risk premium is 8.5 percent, and T-bills are currently yielding 3 percent. The company's most recent dividend was $1.8 per share, and dividends are expected to grow at a 5.5 percent annual rate indefinitely. If the stock sells for $35 per share, what is your best estimate of the company's cost of equity? (Do not round your intermediate calculations.)
rev: 09_20_2012
10.93%
2)Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 9 years to maturity that is quoted at 93 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually.
If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round your intermediate calculations.)
Stock in Country Road Industries has a beta of 1.23. The market risk premium is 8.5 percent, and T-bills are currently yielding 3 percent. The company's most recent dividend was $1.8 per share, and dividends are expected to grow at a 5.5 percent annual rate indefinitely. If the stock sells for $35 per share, what is your best estimate of the company's cost of equity? (Do not round your intermediate calculations.)
Explanation / Answer
1. Cost of equity= [1.8*(1+0.055)/35]+0.055= 0.1093 or 10.93%
2.Pre tax cost of debt= 10.69%
b. After tax= 10.69*(1-.35)= 6.95%
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