Under what situations would you want to use the CAPM approach for estimating the
ID: 2745025 • Letter: U
Question
Under what situations would you want to use the CAPM approach for estimating the component cost of equity? The constant-growth model? Cost of Equity JaiLai Cos. stock has a beta of 1.2, the current risk-free rate is 4.2 percent, and the expected return on the market is 12 percent. What is JaiLai's cost of equity? Cost of Debt KatyDid Clothes has a $250 million (face value) 30-year bond issue selling for 103 percent of par that carries a coupon rate of 7.95 percent, paid semiannually. What would be Katydid's before-tax component cost of debt? Cost of Preferred Stock Marme, Inc. has preferred stock selling for 97.5 percent of par that pays an 8 percent annual coupon. What would be Marme's component cost of preferred? WACC Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 9 percent while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 30 percent, what will be JB's WACC?Explanation / Answer
Question 2) Cost of equity = Risk free rate + Beta * (Return on market - Risk free rate)
= 4.2 + 1.2 * (12 - 4.2)
= 4.2 + 1.2 * 7.8
= 4.2 + 9.36
= 13.56 %
Conclusion:- Cost of equity = 13.56 %.
Question 4) Cost of preferred stock = 8 / 97.5 = 0.0821 i.e., 0.0821 * 100 = 8.21 % (approx)
Question 5) WACC = Weight of equity * Cost of equity + Weight of debt * After-tax Cost of debt
= 0.75 * 15 + 0.25 * 9 ( 1 - 0.30)
= 11.25 + 0.25 * 6.30
= 11.25 + 1.575
= 12.825 % (approx)
Conclusion:- WACC = 12.825 % (approx)
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