Question 18. Aaron Athletics Companys capital structure consists of debt and common stock. The company uses the CAPM to estimate its cost of common equity.

Aaron Athletics Historic Betas: Average beta from 2010 to 2019:1.48 2020 YTD (1/1/2020-12/20/2020): 1.36

Historical S&P500 Market Return Arithmetic average return (1990-2020): 13.2% Geometric (Compound annualized) average rate of return (1990-2020): 10.32%

Historical FTST 100 Index Market return Arithmetic average return (1990-2020): 11.3% Geometric (Compound annualized) average rate of return (1990-2020): 9.93%

Historical Aaron Athletics Market Return Arithmetic average return (1990-2020): 15.6% Geometric (Compound annualized) average rate of return (1990-2020):12.24%

Currently, Aaron Athletics stock price is $50, with a total number of 3 million shares outstanding.

The current 20-year Treasury bond is 2%

The current average yield for the AAA rating corporate bonds is 5%

The companys average effective tax rate is 35%.

Current Yield on publicly trade Aaron Athletics bond which has an AAA rating: Coupon 7% (paid annually), 10 years to maturity.

Current bond price $94 for the face value of $100

Current value of bond is $94,000,000.

a) Find the companys cost of equity (cost of stock).

b) Find the companys weight of debt.

c) Find the companys weight of equity.

d) Find the companys WACC.

e) If the company has a project with an IRR of 15%. Just based on the IRR criterion, do you think the company should accept the project or not? Why?

Please answer in Excel