Question

zonk corp. is a manufacturer of ball bearings. data below is in dollar amounts in millions: total assets $7460 interest-bearing debt $3652 average pre-tax borrowing cost 10.5% common equity: book value $2950 market value $13685 income tax rate 35% market equity beta 1.13 assuming that riskless rate is 4.6% and the market premium is 7.3%, calculate zork's cost of equity capital.

Answer 1

Answer:

Zork's cost of equity capital is 12.85%

Explanation:

Cost of equity=Rf+Beta* Mrp

Rf is the risk-free rate of 4.6% which is rate of return on government security

Beta of the stock is 1.13

Mrp is the market risk premium which is the incentive given over and above the risk free rate in order to compensate investors for risk taken by investing in stock i.e 7.3%

cost of equity=4.6%+(1.13*7.3%)=12.85%