Compute the cost of equity capital using capm

Reference no: EM1315305

Compute the cost of equity capital using CAPM and dividend capitalization model

1. Calculate the after-tax cost of a $25 million debt issue that Pullman Manufacturing Corporation (40% marginal tax rate) is planning to place privately with a large insurance company. This long-term issue will yield 6.6% to the insurance company.

2. Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines, Inc., which is planning to sell $10 million of $4.50 cumulative preferred stock to the public at a price of $48 a share. The company has a marginal tax rate of 40%

3. The following financial information is available on Fargo Fabrics, Inc.

Current per-share market price = $20.25

Current per-share dividend = $1.12

Current per-share earnings =$2.48

Beta = .90

Expected market risk premium = 6.4%

Risk free rate (20 year treasury bonds) = 5.2%

Past ten years earnings per share:

20x1 $1.39 20x6 $1.95

20x2 1.48 20x7 2.12

20x3 1.60 20x8 2.26

20x4 1.68 20x9 2.40

20x5 1.79 20x10 2.48

This past earnings growth trend is expected to continue for the foreseeable future. The dividend pay-out ratio has remained approximately constant over the past ten years and is expected to remain at current levels for the foreseeable future.

Calculate the cost of equity capital using the following methods:

a. The constant growth rate dividend capitalization model approach

b. The capital asset pricing model approach.

Reference no: EM1315305

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