Question
Garcia Ltd. is trying to estimate its cost of common equity, and it has the following information. The firm has a beta of 0.90, the
Garcia Ltd. is trying to estimate its cost of common equity, and it has the following information. The firm has a beta of 0.90, the before-tax cost of the firm's debt is 7.75%, and the firm estimates that the risk-free rate is 5% while the current market return is 13%. The firm pays dividends annually and expects dividends to grow at a constant rate of 5% indefinitely. The most recent dividend per share, paid yesterday, is $2.00. Currently, the firm's stock sells for $35.00 per share, but if the firm issues new shares, it will net $33.15 per share. Finally, the firm has a marginal tax rate of 34%. The cost of common stock using the CAPM is
Select one:
a.
11.50 percent
b.
12.20 percent
c.
11 percent
d.
13.35 percent
e.
11.75 percent
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