A Fifteen, Inc.\'s common stock has a beta of 1.4. The risk-free rate is 5.3 per
ID: 2763282 • Letter: A
Question
A
Fifteen, Inc.'s common stock has a beta of 1.4. The risk-free rate is 5.3 percent and the expected return on the market is 9.2 percent. What is the company’s cost of equity capital?
B
Jensen's Travel Agency has a 4.3 percent preferred stock outstanding that is currently selling for $51.69 a share. The rate of return on the market portfolio is 8.25 percent and the firm's tax rate is 35 percent. What is Jensen's cost of preferred stock? Remember that the usual par value of preferred stock is $100. Enter answer in percents.
C
AisleRiot Group has 1,004 bonds outstanding that are selling for $1,141 each. The company also has 7,676 shares of preferred stock at a market price of $53 each. The common stock is priced at $47 a share and there are 32,211 shares outstanding. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?
Enter weight in percents, accurate to two decimal places.
Explanation / Answer
A. Using the CAPM moodel Cost of equity capital formulla is as follows
ra = rf + Ba (rm-rf)
=5.3 + 1.4(9.2-5.3)
=5.3 + 5.46
=10.76 %
B. Kp = Dp/Po = $4.3per share/$51.69 = 8.32%
Preference divident is not tax deductible so tax rate is irrelavant and market rate is also irrelavant.
C.
The weight of the preferred stock as it relates to the firm's weighted average cost of capital is 13.27% ($406,828/3,066,309 *100)
Total $ Weight Bonds 1,004 bonds*$1,141 each 1,145,564 37.36 Preferred stock 7,676 shares* $53 each 406,828 13.27 Common stock 32,211 shares*$47 a share 1,513,917 49.37 3,066,309 100.00Related Questions
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