Question

Information for Bridgetron

Bridgetron

An analyst wants to value the sum of the debt and equity capital of the firm and is provided with the following information:  

Total Assets	$25,675
Interest-Bearing Debt	$18,525
Average Pre-tax borrowing cost	9.25%
Common Equity:
Book Value	$8,950
Market Value	$34,956
Income Tax Rate	35%
Market Equity Beta	1.05
Risk-free Rate	3.80%
Market Premium	5.70%

An analyst wants to value the common shareholders’ equity of Bridgetron, compute the relevant cost of capital that should be used.

Be sure to show your work.

Answer 1

An analyst wants to value the common shareholders’ equity of Bridgetron. To value common shareholders’ equity, cost of equity should be used as cost of capital.

Given information

i) Market Equity Beta : 1.05

ii) Risk free rate (Rf) : 3.80%

iii) Market Premium (Rm - Rf) : 5.70%

Cost of equity ( Ce) using CAPM model:

Ce = Rf + Beta * (Rm - Rf)

hence,

Ce = 3.80 + 1.05 * 5.70

Ce = 9.785 %

Cost of capital that soud be used to value the common shareholders’ equity of Bridgetron is 9.785%