Question
In anticipation of a major expansion of capital investmentefforts, managers at Fake Company Theta want to re-evaluate the company'scost of capital used for discounting cash
In anticipation of a major expansion of capital investmentefforts, managers at Fake Company Theta want to re-evaluate the company'scost of capital used for discounting cash flows. The rate it uses now has been the same rate for about five years. But the company CFO understands that market, competitive, and company conditions have changed.
Steady profits in recent years haveincreased the equity portion of the company's long-term capital structure to 69.8%. There is no preferred equity, and the most recent dividend was $2.21 paid to shares that are also recently trading at about $17.44. Its dividends typically grow at about 1.8% per year. Its single issue of corporate bonds trade with a yield to maturity of 5.9% and a coupon rate of 5.2%. Over the past five years, the company has paid an average of 28.0% of its profits in taxes.
What is an appropriately updated estimate of this company's cost of capital for capital budgeting purposes?
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