You have been given the following facts and assumptions concerning ABC Corp at D

Question

You have been given the following facts and assumptions concerning ABC Corp at December 31 2013 Yield to maturity on long term government bond is 5 00% Yield to maturity on company long term government bond is 7 0% Coupon rate on company long term bond is 7.0% Market price of risk is 8 0% along with estimated company beta value of 1 5 Stock is selling for $40 in the market and 250 million shares are outstanding Assuming that book value of equity is $5240 million along with book value of interest bearing debt of $1250 million Existing tax rate stands at 35% Given all the information estimate ABC Corps after-tax cost of equity capital?

Explanation / Answer

Risk free rate is yield to maturity on long term government bond.

Cost of equity = Rf + (RM – Rf) x beta

                           = 0.05 + 0.08 x 1.5

                           = 17%

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