You are a manager for Humana Inc., and you are trying to determine the appropria
ID: 2790129 • Letter: Y
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 bill: 2.359% 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 Value Market Price Quote YTM (in millions) (per bond) 7200% 500 104 22A3% $500 million,720% due June 15 2018 $300 million, 6.30% due August 1, 6.300% 300 101 2.420% $400 million, 2.625% due 2.625% 400 98 3700% ctober 1, 2019 $600 million, 315% 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 3150% 103.12 2.480% 3.850% 600 98 3.230% 815096 250 148.22 5.750% 4.625% 400 99.65 4.650% 4.950% 750 100 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 "1.23%" as "0123")Explanation / Answer
Risk Free rate = 2.359%
Market return = 8.50%
Beta = 0.58
Cost of equity is calculated below using CAPM model:
Cost of equity = Risk free rate + (Market Return – Risk free rate) × Beta
= 2.359% + (8.50% – 2.359%) × 0.58
= 2.359% + (6.141% × .58)
= 2.359% + 3.56178%
= 5.92%
Cost of equity for company is 5.92%.
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