Question
Premium Hotels is planning on spending $120 million in new capital projects during 2020. They plan on financing these projects using 30% debt and 70%
Premium Hotels is planning on spending $120 million in new capital projects during 2020. They plan on financing these projects using 30% debt and 70% equity. The current interest rate (Kdbt) is 7.0% and the companys tax rate is 32%. New retained earnings equal $60 million to use on the projects and the Capital Asset Pricing Model is used to estimate the cost of internal equity (Kie). The estimated return on the market portfolio (Km) is 11.5%, the risk-free rate (Rf) is 4.5% and the beta on the projects is 1.2. The premium to raise external equity is 1.5% points (150 basis points). What is Premiums weighted cost of capital (Ka)?
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