Question

Bradshaw Steel has a capital structure with 30 percent debt (all long-term bonds) and 70 percent common equity. The yield to maturity on the company's long-term bonds is 8 percent, and the firm estimates that its overall composite is 10 percent. The risk-free rate, is 5.5 percent, the market risk premium, r,- r, is 5 percent, and the company's tax rate is 40 percent. Bradshaw uses the CAPM to determine its cost of equity. What is the beta on Bradshaw’s stock?

a. 1.48

b. 1.35

c. 1.25

d. 1.10

e. 1.00

Answer 1

Stock Calculation of Beta on Bradshaw's Grinen On Capital Structure - Weight of Delet = .30 (301) Weight of Comman equity = 70 (70%) Querall Cast of firm = 10% Tane Rate = 40% (.40) is we Calculate After Care Cost - Cast of Tong (Delt) X of Delet Cerm Band (1- Cave Rate) = 8 .40) (1 %. 4.8

Now We Coleculate Cast of Comman Stock Querall Cost = After lare & Weight & Cast of x Weight of firm Cost of Debt of Delet Cammon Stock of Stock 10% = 4.81.X .30 + Cost of Stock Xo7 10 - 1.44 = Cost of Stock 12.23% = Cast of Common Stock so Cast of Comman Stock is 12.23%

Now Cost of Using CAPM Model (formula) Risk free & Bela of x (Market Risk Premium) Stock Rate Stock Risk Market Cast of free Rate & 5.5 % Risk Premium & St Stock = 12.23% 12.23% = 5.5% + Beta of stock (3%) Sir. Beta ef Stock & 12.23% - S.S. Beta of Stock = 1.35 ceptian B. 1.35 is Correct So. Beta of Stock