IRR of Project C is MIRR of Project C is Using CAPM, what return should be requi
ID: 2756738 • Letter: I
Question
IRR of Project C is MIRR of Project C is Using CAPM, what return should be required for TAT stock. Its beta is 1.30, the riskfree rate (T-bills) is 2% and the rate of return on the market portfolio (S&P; 500) is 4%? IAA stock price was $17 last year and now it becomes $21 per share. The return on Stock IAA is given that no dividend is distributed. The Imbeciles Assoseation of Americka (IAA) is interested in determining their cost of capital. Compute the after tax cost of each of the following: Assume that the corporate tax rate is 30%. An IAA 20-year bond with an 8% coupon and interest paid semiannually. Investors paid $ 1,000 per bond but the underwriter received $172 per bond for flotation costs. The after tax cost of debt is IAA common stock is issued at a price of $65. Flotation costs were 7.69% of the market price and dividends will be $3.00 in one year and are expected to grow at a rate of 4% per year. The cost of new stock isExplanation / Answer
13. Rate of return: Risk free rate + Beta ( Market return - Risk free return)
2+ 1.30 (2)
d. 4.60 %
14. Present Market price 21. Initial stock price 17.
Market return on Stock: 21 - 17 = 4
Return : 4/17 = 23.5
h. 23.5 %
15. Net proceeds from bond: Issue price - cost of issue
1,000 - 172 = 828
Interest paid: 80
Tax saving on interest : 80 * 30 % = 24
Tax saving on issue cost :
Issue cost amortised: 172/20 = 8.6
Tax on issue cost: 8.6 * .3 = 2.58
Total cost : 80 - 24 - 2.58 = 53.42
Cost of debt: 62.02/ 828 = 53.42 / 828 = 6.45
c. 6.5 %
16. Stock issue price : $ 65
Flotation costs : 7.69 %
Dividend : $ 3
Growth : 4 %
Proceeds from issue : 65 - 7.69% = 60
Dividend : $ 3.00
Increase MPS 65 + 4 % = 67.6
Total earning : 3 + 2.6 = 5.6
Rate of return: 5.6 / 65 = 8.5 %
e. 8.5 %
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