Author Question: As a newly hired financial analyst, your first job at VersaLife Corporation is to calculate the ... (Read 118 times)

bobbie · **on:** Apr 25, 2021

Question 1

Which method is best to compute a firm's cost of equity?
◦ CAPM
◦ Bond yield plus risk premium
◦ Constant growth model
◦ All of these methods
◦ None of these method; use the current market price per share.

Question 2

As a newly hired financial analyst, your first job at VersaLife Corporation is to calculate the company's cost of capital. The present capital structure, which is considered optimal, is as follows:

	Market Value
Debt	$80 million
Preferred Stock	$10 million
Common Equity	$110 million
Total Capital	$200 million

If VersaLife Corporation issues new debt, then the bond market expects a yield of 7.5%. Preferred stock is trading for $96, has a $100 par value and pays an annual dividend of 8% (the next dividend is due in one year). Common equity has a beta of 1.20, the market risk premium is 5%, and the risk-free rate is 3%. If the firm's tax rate is 40%, what is the weighted average cost of capital? Round answers to the nearest tenth.
◦ 7.2%
◦ 7.5%
◦ 8.2%
◦ 8.5%
◦ 9.0%

raenoj · **Reply #1 on:** Apr 25, 2021

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