Question
Company believes the new Designer Shoes was expected to sell for $ 104 per unit and had projected sales of 4700 units in the first
Company believes the new Designer Shoes was expected to sell for $ 104 per unit and had projected sales of 4700 units in the first year, with a projected (Most-Likely currently has 1178000 shares of stock outstanding at a current price of $ 76.00. Even though the company has outstanding stock, it is not publicly traded and therefore there is no publicly available financial information. However, after analysis management believes that its equity beta is 1.04.
The company also has 125000 bonds outstanding, with a current price of $ 1,032.00. The bonds pay interest semi-annually at a coupon rate of 5.10 %. The bonds have a par value of $1,000 and will mature in 14 years. The average corporate tax rate was 39 %.
Management believes the S&P 500 is a reasonable proxy for the market portfolio. Therefore, the cost of equity is calculated using the company's equity beta and the market risk premium based on the S&P 500 annual expected rate of return - Balky would calculate the monthly expected market return using 5 years of past monthly price data available in the worksheet Marketdata. This would then be multiplied by 12 to estimate the annual expected rate. Balky remembered that if the expected rate of return for the market was too low, too high, or negative, a forward looking rate of an historical average of about 9.5% would have to be used, as the calculated value for the current 5-year period may not be representative of the future. Balky would consider a E(Rm) between 8-12% acceptable. Balky would calculate the market risk premium: E(Rm) - Rf from the previous calculations using the risk-free rate data available in the worksheet Marketdata. Balky noted that the risk-free rate was on an annual basis.
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