Keven works as a manager in Berta Inc.; He is trying to determine its cost of de
ID: 2647932 • Letter: K
Question
Keven works as a manager in Berta Inc.; He is trying to determine its cost of debt. The firm has a debt issue outstanding with 10 years to maturity that is quoted at 91 percent of the face value. The issue makes semi-annual payments and has a coupon rate 10 percent annuall
Stock of Berta Inc. has a beta of 1.10. Return of market portfolio is 13 percent and t-bills are currently yielding 5 percent. The company has just paid $2.00 per share and dividends are expected to grow at 7 percent annual rate indefinitely. If the stocks are traded at $36 per share, then what is your best estimate of the Berta Inc.
Explanation / Answer
Calculation of ke
Ke= Risk free return+Beta(Market return-Risk free return)
=5+1.10(13-5)
=13.8%
Po=D1/(Ke-g)
36=2(1.07)/ke-0.07
Ke=12.94%
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