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1. A company has the following capital structure: Security Beta Market value Debt 0 600 Preferred stocks 0.2 200 Common stocks 1.4 800 The risk-free
1. A company has the following capital structure:
Security | Beta | Market value |
Debt | 0 | 600 |
Preferred stocks | 0.2 | 200 |
Common stocks | 1.4 | 800 |
The risk-free rate is 5% and the market risk-premium is 5%.
a. What is the firm assets beta?
(a) 0,625 | (b) 0,725 | (c) 0,925 | (d) 0,8 |
b. What is the expected return on equity (cost of equity):
(a) 10,8% | (b) 9,8% | (c) 13,8% | (d) 11,8% |
c. What discount rate should the company use for evaluating investment projects with similar risk (Tc=16%)?
(a) 7,325% | (b) 8,325% | (c) 9,325% | (d) 10,8% |
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