Question

2. The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 25%. 3. 4. Refer to the data for the Collins Group. Based on the CAPM, what is the firm's cost of common stock

Answer 1

Answer:

The firm's cost of common stock is 13%

Explanation:

Use the following CAPM formula to calculate the cost of common stock

Cost of common stock = Risk free rate + beta x ( Market return - Risk free rate )

Where

Risk free rate  = 5.5%

Market return = 11.50%

Beta = 1.25

Placing values in the formula

Cost of common stock = 5.5% + 1.25 x ( 11.50% - 5.5% )

Cost of common stock = 13%