Question
b) Smart Co. (a UK firm) has beta of 1.14 and the stock market return in the U.S. is expected to be 18 percent annually
b) Smart Co. (a UK firm) has beta of 1.14 and the stock market return in the U.S. is expected to be 18 percent annually while the long-term annualized risk-free rate in the is 8 percent.Smart Co. borrows funds at an interest rate of 10 percent per year. Assuming that the firm is targeting 70 percent to be financed by debt and 30 percent would be financed by issuing common stock. The firm is subject to a 40% corporate tax rate.
i) Estimate the cost of issuing common stock.(6 marks)
ii) Estimate the Weighted Average Cost of Capital (WACC).(6 marks)
c) The Collection Co. has a current beta of 1.6. The market risk premium is 7 percent and the risk-free rate of return is 3 percent. Determine the value for the cost of equity increase if the company expands their operations such that their company beta rises to 1.9.(3 marks)
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