Assets 10million Debt 40 million Equity 60 million Interest rate on debt 10% Ris

Question

Assets                              10million

Debt                                     40 million

Equity                                   60 million

Interest rate on debt       10%

Risk free rate of retun       4%

Expected MArket rate       12%

Beta                                        1.2

Tax rate                                    40%

1. What is the firms pre tax cost of equity using the CAPM?

2. What is the firms after tax cost of equity using CAPM?

3. what is the firms pre tax cost of debt?

4. What is the firms after tax cost of debt?

5. What is th firms weighted cost of capital?

Explanation / Answer

ssets 10million

Debt 40 million

Equity 60 million

Interest rate on debt 10%

Risk free rate of retun 4%

Expected MArket rate 12%

Beta 1.2

Tax rate 40%

1. What is the firms pre tax cost of equity using the CAPM?

As per CAPM

Required Rate of Return of stock (pre tax cost of equity)= Rf + (Rm-Rf)*Beta

Required Rate of Return of stock (pre tax cost of equity) = 4 + (12-4)*1.2

Required Rate of Return of stock (pre tax cost of equity) = 13.60%

Required Rate of Return of stock (pre tax cost of equity) = 13.60%

2. What is the firms after tax cost of equity using CAPM?

As per CAPM

Required Rate of Return of stock (after tax cost of equity)= Rf + (Rm-Rf)*Beta

Required Rate of Return of stock (after tax cost of equity) = 4 + (12-4)*1.2

Required Rate of Return of stock (after tax cost of equity) = 13.60%

3. what is the firms pre tax cost of debt?

pre tax cost of debt = 10%

4. What is the firms after tax cost of debt?

after tax cost of debt = 10*0.60 = 6%

5. What is th firms weighted cost of capital?

weighted cost of capital = 13.60*0.60 + 6*0.40

weighted cost of capital = 10.56%

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