Question

nes Finance X Chapter 12 Assignment X G Mojo Mining has a bond outstan X + C newconnect.mheducation.com/flow/connect.html Chapter 12 Assignment Saved Help Save & Exit Submit The stock in Bowie Enterprises has a beta of 119. The expected return on the market is 11.70 percent and the risk-free rate is 3.02 percent. What is the required return on the company's stock? 03:20-5 1 0 0 0 0 0 Frey 1 of 10 Next > w Phag e no Mom EN - G O

Answer 1

1)

Risk free rate = 3.02%

Beta = 1.19

Market return = 11.7%

Market risk premium = 11.7% - 3.02% = 8.68%

Expected return on equity = 3.02% + 1.19* 8.68% = 13.35%

2)

Risk free rate = 2.93%

Beta = 0.89

Market risk premium = 7.2%

Cost of equity = 2.93% + 0.89* 7.2% = 9.34%

3)

Price of the bond(PV) = $ 2165

Years to maturity (nper) = 17 years = 17*2 = 34 periods (since semi annual)

Par value of the bond(FV) = 2000

Coupon rate = 7.06%

Annual coupons = 7.06% * 2000 = 141.2

Semi annual coupons (PMT) = 141.2/2 = 70.6

YTM of the bond (rate) = rate( nper,pmt,pv,fv) = 3.13%

Annual YTM = 3.13 * 2 = 6.26%

After tax cost of debt = 6.26%*(1-39%) = 3.82%