Part 4 (ch12) Questions Numeric
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 1.161. If the risk-free rate is 5.012 percent and the market risk premium is 8.004 percent, calculate the security’s cost of equity capital?
Q: Suppose a security’s beta is 1.149. If the risk-free rate is 4.996 percent and the expected return of the market portfolio is 13.016 percent, calculate the security’s cost of equity capital?
Answer:
14.301
14.21
Q2: Cost of Debt
Q: Suppose a company has outstanding bonds with a yield to maturity of 10.003 percent, a beta of 0.15, a rating with a probability of default of 49.997 percent and expected loss rate of 7.011 percent. If corresponding risk-free rates were 6.486 percent, and the market risk premium was 8.006 percent, estimate the expected return of the company’s debt using the CAPM and the default rate method.
CAPM:
Expected default method:
Answer:
CAPM: 7.687
Expected default method: 6.498