You are a manager for Humana Inc., and you are trying to determine the appropria

Question

You are a manager for Humana Inc., and you are trying to determine the appropriate discount rate to use in valuations of average risk project proposals for the company. You have the following information YTM on 10-year Treasury b2.359% Beta on common stock: 0.58 Expected return on market portfolio: 8.5% Additionally, you collected the following information from Humana's most recent annual financial disclosure and market prices on current bond issues Bond Issue Coupon Rate Total Book Valuc in milions) Market Price Quote per bond) YTM 104 2.240% $500 million, 7.20% due June 15. 2018 6.300% 101 2.420% $300 million, 6.30% due August 1. 2018 2.625% 3.15 3.85 8.15 3.700% 2.480% 3.230% 5750% $400 million, 2.625% due 98 ctober 1, 2019 $600 million, 3.15% due December 1, 2022 $600 million, 3.85% due October 1, 2024 $250 million, 8.15% due June 15. 2038 $400 million, 4.625% due December 1, 2042 $750 million, 4.95% due October 103.12 98 148.22 4.625% 99.65 4.650% 4.9 4.950% 2044 The market price for one share of common stock is $255.27, and there are 146.280 million shares outstanding. What is Humana's cost of equity? Enter your answer as a decimal, rounding to the nearest ten-thousandth. (For example, write n1.23%" as "0123*)

Explanation / Answer

Using CAPM, Cost of equity, ke = Rf + beta x (Rm - Rf)

Here, Rf - Risk-free rate = 2.359%, beta = 0.58 and Rm - Market Rate = 8.5%

=> ke = 5.921%

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