Part 4 (ch12) Questions Numeric
Last updated: 19/03/2025
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 0.91. If the risk-free rate is 4.984 percent and the market risk premium is 7.998 percent, calculate the security’s cost of equity capital?
Q: Suppose a security’s beta is 1.042. If the risk-free rate is 5.013 percent and the expected return of the market portfolio is 12.982 percent, calculate the security’s cost of equity capital?
Answer:
12.264
13.32
Q2: Cost of Debt
Q: Suppose a company has outstanding bonds with a yield to maturity of 9.998 percent, a beta of 0.15, a rating with a probability of default of 49.992 percent and expected loss rate of 7.012 percent. If corresponding risk-free rates were 6.502 percent, and the market risk premium was 7.992 percent, estimate the expected return of the company’s debt using the CAPM and the default rate method.
CAPM:
Expected default method:
Answer:
CAPM: 7.701
Expected default method: 6.493
Q3: Cost of Capital
Q: Use the following information to answer the question(s) below:
| Company | Beta | Volatility (%) |
|---|---|---|
| A | 0.52 | 24.62 |
| B | 0.91 | 19.82 |
| C | 1.11 | 32.89 |
| D | 1.22 | 28.19 |
Assume that the risk-free rate of interest is 2.71% and you estimate the market’s expected return to be 7.79%.
What is the cost of capital of Company A?
What is the cost of capital of Company B?
What is the cost of capital of Company C?
What is the cost of capital of Company D?
Answer:
5.35
7.33
8.35
8.91