The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions):
$\begin{array}{llcc}
\text { Total assets } &\$6,840 \
\text { Interest-beaning debt } &\$3,562\
\text { Average pre-tax borrowing cost} &11.59\%\
\text {Common equity: } &\
\text { Book value } &\$2,560\
\text { Market value } &\$12,850\
\text { Income tax rate } &35\%\
\text {Market equity beta } &1.24\
\end{array}$
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Assuming that riskless rate is 4.2% and the market premium is 6.2% calculate Zonk's cost of equity capital:
A) 10.4%
B) 7.69%
C) 11.89%
D) 2.0%

Question

The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions):
$\begin{array}{llcc}
  \text { Total assets } &\$6,840  \
 \text { Interest-beaning debt } &\$3,562\
 \text {  Average pre-tax borrowing cost} &11.59\%\
 \text {Common equity:  } &\
 \text { Book value } &\$2,560\
 \text { Market value } &\$12,850\
\text { Income tax rate } &35\%\
 \text {Market equity beta  } &1.24\
\end{array}$
-
 Assuming that riskless rate is 4.2% and the market premium is 6.2% calculate Zonk's cost of equity capital:
A) 10.4%
B) 7.69%
C) 11.89%
D) 2.0%

Quizplus · Accepted Answer

The cost of equity capital can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Cost of Equity = Risk-Free Rate + Beta * (Market Premium). Plugging in the values: Cost of Equity = 4.2% + 1.24 * 6.2% = 4.2% + 7.688% = 11.888%. Rounded, this gives 11.89%.

The Following Data Pertains to Zonk Corp - Assuming That Riskless Rate Is 4

The Following Data Pertains to Zonk Corp -
Assuming That Riskless Rate Is 4