Exhibit 9.1
The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.

The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%.
-Refer to Exhibit 9.1.Based on the CAPM,what is the firm's cost of common stock?
A) 11.15%
B) 11.73%
C) 12.35%
D) 13.00%
E) 13.65%

Question

Exhibit 9.1
The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.
  
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%.
-Refer to Exhibit 9.1.Based on the CAPM,what is the firm's cost of common stock?
A) 11.15% 
B) 11.73% 
C) 12.35% 
D) 13.00% 
E) 13.65%

Quizplus · Accepted Answer

$$\begin{array}{l}
\begin{array} { l } 
I _ { R F } \
I _ { \text {Expected } } r _ { M } \
R P _ { M } = \text { Expected return an Market } - r _ { R F } = \
r _ { s } = r _ { R F } + r _ { R F } \left( R P _ { M } \times b \right)
\end{array}
\begin{array} { l } 
5.50 \% \
11.50 \% \
6.00 \% \
1.25\% \
13.00\% 
\end{array}
\end{array}$$

Exhibit 9.1 The Collins Group, a Leading Producer of Custom Automobile Accessories