Estimate the firms cost of common equity using capm

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Reference no: EM131984017

Set your calculator to 3 decimal places. You have compiled the following information to estimate the firm's weighted average cost of capital.

The common stock is currently selling for $29.60 per share, and 300,000 shares have been issued. The dividend just paid was $1.88, and the dividend was $1.61 four years earlier.

The firm's dividend payout ratio is typically 40%, and its ROE is 8%. Assume the rate on Treasury Bills is 1.5 percent, the market rate of return is 13.5%, and your stock's Beta is .90. The yield on 30-year Treasury Bonds is 3%.

Your firm has long-term debt in the form of bonds with a yield to maturity of 6%. The par value is $1,000; and 3,000 bonds were issued. Due to the increase in the market rate of interest, the bonds are selling for $740. The firm's tax rate is 35%. The firm has no target capital structure.

The balance sheet is provided below.

Current Assets $ 2,000,000

Current Liabilities $ 1,000,000

Net Fixed Assets 8,000,000

Bonds Payable 3,000,000

Common Stock 1,950,000

Retained Earnings 4,050,000

Total Assets $10,000,000

Total Financing $10,000,000

a. Estimate the firm's growth rate in dividends using the retention ratio method.

b. Estimate the firm's cost of common equity using CAPM.

c. Estimate the firm's cost of long-term debt capital.

d. Estimate the firm's capital structure using market values.

e. Calculate the firm's weighted average Cost of Capital. Use the CAPM cost of equity, your cost of debt capital, and the market value capital structure.

Reference no: EM131984017

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