15. Paul Sharp is CFO of Fast Rocket Inc. He tries to determine the cost of equi
ID: 2646085 • Letter: 1
Question
15. Paul Sharp is CFO of Fast Rocket Inc. He tries to determine the cost of equity financing for his company. The stock has a beta of 1.45. Paul estimated that the market return is 6.86%. The current rate for 10-year Treasury Bonds is 3.45%. Calculate cost of common equity financing using CAPM 15. Paul Sharp is CFO of Fast Rocket Inc. He tries to determine the cost of equity financing for his company. The stock has a beta of 1.45. Paul estimated that the market return is 6.86%. The current rate for 10-year Treasury Bonds is 3.45%. Calculate cost of common equity financing using CAPMExplanation / Answer
15)
As per CAPM
Cost of common equity = Risk free rate + ( market return -Risk free rate)*beta
Risk free rate= 3.45%
Market return = 6.86%
Beta = 1.45
Cost of common equity = 3.45 + (6.86-3.45)*1.45
Cost of common equity = 8.39%
16)
Using Excel Formula
Before -Tax Cost of Debt= rate(nper,pmt,pv,fv)
Nper (indicates the Number of Years to Maturity) = 20
PV (indicates the net price) = 1181 - 2.51 = 1178.49
PMT (indicate the annual payment) = 1000*10.59% = 105.90
FV (indicates the par value) = 1000
Rate (indicates Before -Tax Cost of Debt) = ?
Before -Tax Cost of Debt = rate(20,105.90,-1178.49,1000)
Before -Tax Cost of Debt = 8.68%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.