15. Paul Sharp is CFO of Fast Rocket Inc. He tries to determine the cost of equi

Question

15. Paul Sharp is CFO of Fast Rocket Inc. He tries to determine the cost of equity financing for his company. The stock has a beta of 1.45. Paul estimated that the market return is 6.86%. The current rate for 10-year Treasury Bonds is 3.45%. Calculate cost of common equity financing using CAPM 15. Paul Sharp is CFO of Fast Rocket Inc. He tries to determine the cost of equity financing for his company. The stock has a beta of 1.45. Paul estimated that the market return is 6.86%. The current rate for 10-year Treasury Bonds is 3.45%. Calculate cost of common equity financing using CAPM

Explanation / Answer

15)

As per CAPM

Cost of common equity = Risk free rate + ( market return -Risk free rate)*beta

Risk free rate= 3.45%

Market return = 6.86%

Beta = 1.45

Cost of common equity = 3.45 + (6.86-3.45)*1.45

Cost of common equity = 8.39%

16)

Using Excel Formula

Before -Tax Cost of Debt= rate(nper,pmt,pv,fv)

Nper (indicates the Number of Years to Maturity) = 20

PV (indicates the net price) = 1181 - 2.51 = 1178.49

PMT (indicate the annual payment) = 1000*10.59% = 105.90

FV (indicates the par value) = 1000

Rate (indicates Before -Tax Cost of Debt) = ?

Before -Tax Cost of Debt = rate(20,105.90,-1178.49,1000)

Before -Tax Cost of Debt = 8.68%

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