Part 4 (ch12) Questions Numeric
Last updated: 31/01/2025
Type your answers with “.” instead of “,”! For numerical answers, use 2 decimal places. For instance, if your answer is 0.12345 or 12.345%, type, “12.34” in the box.
Q1: Cost of Equity Capital
Q: Suppose a security’s beta is 1.257. If the risk-free rate is 4.995 percent and the market risk premium is 7.996 percent, calculate the security’s cost of equity capital?
Q: Suppose a security’s beta is 0.649. If the risk-free rate is 5.004 percent and the expected return of the market portfolio is 12.991 percent, calculate the security’s cost of equity capital?
Answer:
15.044
10.19
Q2: Cost of Debt
Q: Suppose a company has outstanding bonds with a yield to maturity of 10.011 percent, a beta of 0.15, a rating with a probability of default of 50.003 percent and expected loss rate of 6.987 percent. If corresponding risk-free rates were 6.497 percent, and the market risk premium was 7.984 percent, estimate the expected return of the company’s debt using the CAPM and the default rate method.
CAPM:
Expected default method:
Answer:
CAPM: 7.694
Expected default method: 6.517