The Up and Coming Corporation\'s common stock has a beta of 1.20. If the risk-fr

Question

The Up and Coming Corporation's common stock has a beta of 1.20. If the risk-free rate is 3.0 percent and the expected return on the market is 14 percent, Up and Coming's cost of equity is____________________ percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 102 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually. Company's pretax cost of debt is______________ percent. If the tax rate is 37 percent, the aftertax cost of debt is_____________ percent. (Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

a ) Cost of Equity = Risk Free Rate + Beta * (Expected Return on the market - Risk Free Rate)

= 3% + 1.2 *(14%-3%)

Cost of Equity = 16.20%

b) Since, the face value of debt is not mentioned , we assume that it is $ 1000.

Book Value of debt (B)= $ 1000

Redemption value (R)= $ 1020

Number of years (N)= 15*2 = 30

Interest (I)= 10%

Pretax cost of debt = I+ (R-B)/N/(R+B)/2

= 100 + (1020-1000)/30/(1020+1000)/2

= 9.97%

After tax cost of debt = I(1-tax)+ (R-B)/N/(R+B)/2

= 100 (1-37%)+ (1020-1000)/30/(1020+1000)/2

= 6.30%

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