ompute the required rate of return on investment i given the following informati

Question

ompute the required rate of return on investment i given the following information: the market risk premium is 5%, 6%; B-|2. 40 a. b. Compute rm The Solar Utility Company has projected a capital budget of $5 million for 2011. The capital structure (based upon market values) is 30 percent debt and 70 percent common equity. Management believes this structure to be optimal. Solar Utility has a combined federal/state/local tax rate of40%. The following information has been collected about Solar Utility's securities. 41. Debt: The new debt to be issued is forecast to have a yield to maturity (i.e., before-tax cost of debt) of 9.03%. Common stock: Market price $44, very recently paid dividend $2, expected growth rate 10 percent. Flotation cost for a new stock issue would run about 8 percent. However, Solar Utility has adequate retained earnings. No external equity will be used in the near future. Compute Solar Utility's weighted average cost of capital (kwACC) 42. Cream of Tomato Company has the following data available. Net income available to common stockholders = $250,000 Sales = $2.5 million Total asset turnover 3 Ratio of common equity to total assets = 0.4 Note that this ratio is sometimes called the equity ratio Cream of Tomato does not have any preferred stock outstanding. Calculate the return on assets and return on common equity for Cream of Tomato.

Explanation / Answer

40)

a)

b)

Required return on market is 11% (6%+5%)

Required rate of return (r) Rf+×Rp Here, Risk free rate of return (Rf) 6.00% Beta of the stock ()                            1.20 Market risk premium (Rp) 5.00% Required rate of return (r) 12.00% 6%+1.20*5%

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.