Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend next year. The 5-year-old firm has a beta of 1.25 and current earnings of $0.90 per share. The current Treasury bill rate is 6.10%, and the market risk premium is 8.8%. Determine Haulsee's cost of equity if the firm's tax rate is 40%.

Question

Business

Sophia Knox

18 May, 00:38

Haulsee Inc. pays no dividend currently but is expected to start paying a small dividend next year. The 5-year-old firm has a beta of 1.25 and current earnings of $0.90 per share. The current Treasury bill rate is 6.10%, and the market risk premium is 8.8%. Determine Haulsee's cost of equity if the firm's tax rate is 40%.

+5

Answers (1)

Know the Answer?

Cameron · Answer 1

17.10%

Explanation:

The computation of the cost of equity is shown below:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

= 6.10% + 1.25 * 8.8%

= 6.10% + 11%

= 17.10%

The (Market rate of return - Risk-free rate of return) is also known as market risk premium and the same is applied.

All other information which is given is not relevant. Hence, ignored it