Question

1)    You are estimating the cost of equity capital for a firm and rely on the following comparable

firms:

Peer firms Observed Beta D/E Tax Rate

Firm A 1.22 .81 40%

Firm B 1.76 1.22 30%

Firm C .99 .25 40%

Firm D .93 .33 30%

Firm E .81 .00 30%

a)    [1 point] You know that the target D/E ratio for your firm is 0.40, and the tax rate is 30%. Further, the risk free rate is 3.50%, and the expected return on the market is 10.50%. What is the estimated cost of equity capital? [When aggregating the data, use the equally-weighted average of the peer firms].

A)   11.49%            

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