The current risk-free rate is 2.5%. The market risk premium is 5%. If CC\'s mark
ID: 2738532 • Letter: T
Question
The current risk-free rate is 2.5%. The market risk premium is 5%. If CC's market beta is 1.5, what is its required rate of return on common stock?
9.00%
8.75%
10.00%
7.50%
4 points
QUESTION 5
CC currently has $130,000 of outstanding interest-bearing debt carrying a 6% interest rate. Its marginal tax rate is 30%. CC also has $25,000 of non-controlling interest in its subsidiary that has a cost of 12%. CC has 5,000 shares outstanding with a market price of $79 per share. What is CC's weight of common stock for the purpose of calculating its weighted average cost of capital (WACC)?
71.82%
32.91%
75.24%
3.85%
Actual Projected 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Comprehensive Income $13,696 $27,990 $30,048 $32,252 $34,612 $37,138 Common Shareholders’ Equity: Paid-In Capital $8,626 $9,488 $10,438 $11,482 $12,630 $13,892 Retained Earnings 127,320 137,384 154,036 161,914 187,910 194,048 Accumulated Other Comprehensive Income (5,376) (5,376) (5,376) (5,376) (5,376) (5,376) Total Common Equity $130,570 $141,496 $159,098 $168,020 $195,164 $202,564Explanation / Answer
1) Answer (C) 10%
Calculation of Required rate of return :
Using CAPM Approach,
Required rate of return = 2.5% + 1.5*5%
= 10%
2) Answer (C) 75.24%
Calculation of WACC of CC :
Market value of common stock = $395000 (5000*79)
Debt value = $135000
Total capital = $525000
Weight of common stock = 395000/525000
= 75.24%
Since face value of stock not available,we just considered 79 as face value.Non controlling interest in subsidiary is a
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