Question

1.     Billy Sharpe just started work for Maynard Industries. He recently discovered that Maynard’s employees had been evaluating capital budgeting projects at a discount rate of 17%, which was calculated 5 years ago when rates were substantially higher and the firm’s capital structure was more skewed toward equity. He has discovered the following:

1.         The firm’s beta is 0.8; the stock sells for $20.00 per share and there are 2,000,000

shares outstanding;

2.         T-bills are yielding 4%, and the firm’s debt is yielding 8%.

3.         The firm’s debt consists of 10,000 debentures, each with $1000 par value, with a

current quote in the newspaper of 120.

4.         The preferred shares consist of 200,000, 8% shares with a par value of $35.

Currently these sell for $40 each.

5.         The Market Risk Premium is 7.5%.

6.         The tax rate is 40%.

 

Compute Maynard Industries’ required rate of return.

Answer 1