Shares of the Pacific Electric Company (PEC) have an estimated Beta of 1.10. PEC funds its assets with 50 percent debt at an average after-tax cost of debt of 6 percent. The excess return of the market portfolio is 5 percent and the risk-free rate is 3 percent. Question A. what is PEC's estimated cost of equity according to the CAPM? Question B. what is PEC's estimated weighted average cost of capital?
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Shares of the Pacific Electric Company (PEC) have an estimated Beta of 1.10. PEC funds its assets with 50 percent debt at an average after-tax cost of debt of 6 percent. The excess return of the market portfolio is 5 percent and the risk-free rate is 3 percent.
Question A. what is PEC's estimated
Question B. what is PEC's estimated weighted average cost of capital?
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- The following were gathered for estimating the cost of equity of KKK Corporation: Return on Treasury Bonds = 4%; Return on the Market = 10%; Return on KKK Bonds = 6%. Upon analysis, you determined that the beta of KKK shares relating to the market return is 1.2 while a risk premium of 4% should be given to KKK's investors over its creditors. How much is the cost of equity using the capital asset pricing model?You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)According to the following information, what is the firm's optimal capital structure? Proportion Earnings Per Weighted Average Cost of Debt Share (EPS) of Capital (WACC) 30% $2.50 13.2% 40 3.80 12.7 50 4.75 12.4 60 5.25 12.8 To determine the optimal capital structure, the market value of the stock must be known.
- The cost of raising capital through retained eamings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 4.23 % , while the market risk premium is 6.63 %. the D'Amico Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, D'Amico's cost of equity is The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Hoover's bonds yield 11.52%, and the fim's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55 %. Based on the bond-yield-plus-risk-premium approach, Hoover's cost of internal equity is: 18.08% 14.32% 15.07% 18.84% The cost of equity using the discounted cashflow (or dividend growth) approach Kirby Enterprises's stock is currently selling for $32.45…Given the information below. Find the Weighted Average Cost of Capital Market Value of Equity = $22,000,000; Debt = $15,000,000; Cash or Cash Equivalents = $15,000,000 iD = 0.10 or 10% iMKT = 0.17 or 17% tCorp = 0.30 or 30% bK = 1.5 IRF = 0.02 = 2%The calculation of WACC involves calculating the weighted average of the required rates of return on debt and equity, where the weights equal the percentage of each type of financing in the firm's overall capital structure. re . has $3.9 million of debt, $1 million of preferred stock, and $1.2 million of common equity. What would be its weight on preferred stock? Ip Is is the symbol that represents the before-tax cost of debt in the weighted average cost of capital (WACC) equation. rd 0.13 0.64 0.16 0.14
- The following were gathered for estimating the cost of equity of KKK Corporation: Return on Treasury Bonds = 4%; Return on the Market = 10%; Return on KKK Bonds = 6%. Upon analysis, you determined that the beta of KKK shares relating to the market return is 1.2 while a risk premium of 4% should be given to KKK's investors over its creditors. How much is the cost of equity using the bond plus risk premium?Calculate the cost of equity with the CAPM Calculate the cost od debt based on what the company is currently paying for its debt - Beta of the industry = 1.16 - Equity Risk Premium = 6.97% - Risk-free rate = 3.77% - Objective capital structure of the industry = 13.24%Whispering Pines Inc. is all-equity-financed. The expected rate of return on the company's shares is 9.65%. a. What is the opportunity cost of capital for an average-risk Whispering Pines investment? (Enter your answer as a percent rounded to 2 decimal places.) Opportunity cost of capital % b. Suppose the company issues debt, repurchases shares, and moves to a 24% debt-to-value ratio (D/ V = 0.24). What will be the company's weighted-average cost of capital at the new capital structure? The borrowing rate is 5.75% and the tax rate is 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Weighted-average cost of capital
- The cost of raising capital through retained earnings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 4.67% while the market risk premium is 5.75%. The Jefferson Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Jefferson’s cost of equity is . The cost of equity using the bond yield plus risk premium approach The Jackson Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Jackson’s bonds yield 11.52%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Jackson’s cost of internal equity is: 18.84% 18.08% 15.07% 14.32%Assume that your company is trying to determine its optimal capital structure, which consists only of debt and common stock. To estimate the cost of debt, the company has produced the following table: 09.86% 9.56% Percent Financed With Debt 10.16% 8.96% 9.26% 0.10 0.20 0.30 0.40 0.50 Percent Financed With Equity 0.90 0.80 0.70 0.60 0.50 Debt/Equity Ratio Now assume that the company's tax rate is 40 percent, that the company uses the CAPM to estimate its cost of common equity, Ks, that the risk-free rate is 5 percent and the market risk premium is 6 percent. Finally assume that if it has no debt its WACC would be equal to its cost of equity which would be equal to 11 percent (you should now be able to determine its "unlevered beta," bu). 0.10/0.90 0.11 0.20/0.80 0.25 Given this information, determine the firm's cost of capital if it finances with 40 percent debt and 60 percent equity. 0.30/0.70=0.43 0.40/0.600.67 0.50/0.50 = 1.00 Bond Rating AA A A BB B Before-Tax Cost of Debt 7.0% 7.2%…The cost of raising capital through retained earnings is The cost of equity using the CAPM approach the cost of raising capital through Issuing new common stock. The current risk-free rate of return (IRF) IS 4.67% while the market risk premium is 5.75%. The Wilson Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Wilson's cost of equity is The cost of equity using the bond yield plus risk premium approach The Taylor Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Taylor's bonds yield 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Taylor's cost of internal equity is: ○ 15.21% O 13.83% 13.14% 17.29% The cost of equity using the discounted cash flow (or dividend growth) approach Tyler Enterprises's stock is currently selling for $25.67…