Question
A firm has a debt-to-equity ratio of 1:1. The firms debt beta is 0.2. Five-year government bonds yield 5% pa with a coupon rate of
A firm has a debt-to-equity ratio of 1:1. The firms debt beta is 0.2. Five-year government bonds yield 5% pa with a coupon rate of 8% pa. The market's expected dividend return is 3% pa and its expected capital return is 7% pa. The firm stocks next dividend is expected to be $1, paid one year from now. Dividends are expected to be paid annually and grow by 1% pa forever. The current stock price $10. The corporate tax rate is 30%. Assume a classical tax system. Which statement is NOT correct?
a. The expected return on debt is 8.4% pa.
b. The expected return on equity is 11% pa.
c. The beta of the firms assets is 0.7.
d. The firms after-tax WACC is 7.6% pa.
e. The beta of the firm's equity is 1.2.
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