Question
The total market value of ABC stocks is $6.000.000 and the total market value of its risk-free debt is $4.000.000. The financial analyst estimates the
The total market value of ABC stocks is $6.000.000 and the total market value of its risk-free debt is $4.000.000. The financial analyst estimates the beta of the stocks at 1.5 and the market premium at 10% for a risk-free rate of 8%.
a)Evaluate the expected return (cost of equity) of the ABC stocks.
b)If the company has a beta equals to 0.9, estimate the cost of capital of the company.
c)Suppose that ABC pays back $3.000.000 of its debt and replace them by preferred shares with a beta of 1.2. The new beta of the company becomes then equal to 1.26. What is the new weighted average cost of capital?
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