A firm has 5,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 55,000 bonds outstanding, each selling for $990 with a $1000 face value. The bonds mature in 15 years, have a coupon rate of 8%, and pay coupons semi-annually. The firm's equity has a beta of 2.0, and the expected market return is 15%. The tax rate is 35% and the WACC is 16%. Calculate the risk-free rate.
A) 27.68%
B) 1.79%
C) 2.32%
D) 2.12%

Question

Quizplus · Accepted Answer

The risk-free rate can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging and solving for the risk-free rate gives approximately 2.32%.

A Firm Has 5,000,000 Shares of Common Stock Outstanding, Each