LeeBurly Corporation ’s financial manager , Mr. George Peltay, has collected the

Q: LeeBurly Corporation ’s financial manager , Mr. George Peltay, has collected the

Calculation of company's common equity: Cost of common equity = Risk free rate + Market premiun * beta of the stock = 5% + 6% *1.6 = 5% + 9.6% = 14.6% Cost of common equity is 14.6% Cost of common equity = Risk free rate + Market premiun * beta of the stock = 5% + 6% *1.6 = 5% + 9.6% = 14.6% Cost of common equity is 14.6%

ID: 2668062 • Letter: L

Question

LeeBurly Corporation ’s financial manager , Mr. George Peltay, has collected the following information to calculate its WACC:

• LeeBurly’s capital structure consists of 40% debt and 60% common stock.
• LeeBurly has 25-year, 12% annual coupon bonds that have a face value of $1,000 and sell for $1,252.
• LeeBurly uses the CAPM to calculate the cost of common stock. Currently, the risk-free rate is 5% and the market risk premium is 6%. LeeBurly’s common stock has a beta of 1.6. LeeBurly’s tax rate is 40%.(7 points)

What is the company’s cost of common equity?

Explanation / Answer

Calculation of company's common equity: Cost of common equity = Risk free rate + Market premiun * beta of the stock = 5% + 6% *1.6 = 5% + 9.6% = 14.6% Cost of common equity is 14.6% Cost of common equity = Risk free rate + Market premiun * beta of the stock = 5% + 6% *1.6 = 5% + 9.6% = 14.6% Cost of common equity is 14.6%

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LeeBurly Corporation ’s financial manager , Mr. George Peltay, has collected the

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LeeBurly Corporation ’s financial manager , Mr. George Peltay, has collected the

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