Smaltz Enterprises is currently involved in its annual review of the firms cost of capital Historically, the firm has relied on the CAPM to estimate its cost of equity capital The firm estimates that its equity beta is 1 25 and the yield to maturity on long term US Treasury bonds is 4 28 The firms ...

The Answer is in the image, click to view ...

Smaltz Enterprises is currently involved in its annual review of the firms cost of capital. Historically, the

Question:

Smaltz Enterprises is currently involved in its annual review of the firm’s cost of capital. Historically, the firm has relied on the CAPM to estimate its capital. The firm estimates that its equity beta is 1.25 and the yield to on long-term US Treasury bonds is 4.28%. The firm’s CFO is currently in a debate with one of the firm’s advisers at its investment bank about the level of the market risk premium. Historically, Smaltz has used 7% to approximate the market risk premium. However, the investment banker argues that this premium has shrunk dramatically in recent years and is more likely to be in the 3% to 4% range. a. Estimate Smaltz’s capital using a market risk premium of 3.5%.
b. Smaltz’s is comprised of 75% equity (based on current market prices) and 25% debt on which the firm pays a yield of 5.125% before taxes at 25%. What is the firm’s WACC using both a 3% and 4% market risk premium?
Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...