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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%.

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  1. 18 May, 04:21
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    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
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