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Using the information from the table, and assuming that the risk-free rate is 4.5% and the...

Using the information from the table, and assuming that the risk-free rate is 4.5% and the market risk premium is 6.2%, calculate Day-Brite's cost of equity capital, using the capital asset pricing model: Day-Brite Interest-Bearing Debt $10,124 Average borrowing rate for debt 6.2% Common Equity: Book Value $18,120 Market Value $25,700 Marginal Income Tax Rate 32% Market Equity Beta 1.23

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Homework Answers

Answer #1

Cost of Equity using CAPM

=

= 4.5% + 1.23 (6.2)

= 12.126%

Equity market Value = 25700

Debt Value = 10124

Total Capital 25700 + 10124 = 35,824

WACC = (Cost of Equity * Weight of Equity) + (Cost of Debt after tax * Weight of Debt)

= (12.126% * 25700 / 35824) + (6.2%(1+0.32) * 10,124 / 35,824)

= 8.69914582402% + 1.19145779365%

= 9.89%

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