1. Design Interiors has a beta of 1.1. The yield on a 3-month T-bill is 3.8% and
ID: 2700965 • Letter: 1
Question
1. Design Interiors has a beta of 1.1. The yield on a 3-month T-bill is 3.8% and the yield on a 10-year T-bond is 5.6%. The market risk premium is 4.5%, but the stock market return in the previous years was 12.4%. What is the estimated cost of common equity using the CAPM?
2. Alex Rodrigues Stadiums has a target capital structure of 35% debt and 65% equity. The yield to maturity on the company's outstanding bonds is 8.75%, and the company's tax rate is 40%. Rodriques' CFO has calculated the company's WACC as 9.25%. What is the company's cost of equity capital?
Please answer in XX.XX% and show your work. Greatly appreciated!
Explanation / Answer
1.
cost of common equity using the CAPM= rf+ betaxmarket risk premium
Ke= 3.8+(1.1x4.5)= 8.75%
2.
WACC= KexWe+[KdxWdx(1-t)]
9.25= Kex.65+[.35x8.75x(1-.4)]
Ke= (9.25-1.8375)/.65
Ke= 11.40%
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