A firm has 4,000,000 shares of common stock outstanding, each with a market price of $12.00 per share. It has 25,000 bonds outstanding, each selling for $980. The bonds mature in 20 years, have a coupon rate of 9 percent, and pay coupons semiannually. The firm's equity has a beta of 1.5, and the expected market return is 15 percent. The tax rate is 30 percent and the WACC is 15 percent. What is the risk-free rate?
A)6.28 percent
B)8.00 percent
C)9.22 percent
D)19.36 percent

Question

Quizplus · Accepted Answer

To calculate the risk-free rate, we need to use the CAPM formula and solve for the risk-free rate.

rE = rf + βE(rM - rf)

rE = WACC = 15%
βE = 1.5
rM = 15%

15% = rf + 1.5(15% - rf)

15% = 2.25rf + 15% - 1.5rf

0.75rf = 0%

rf = 0% / 0.75

rf = 6.28%

Therefore, the risk-free rate is 6.28%, which is answer choice A.

A Firm Has 4,000,000 Shares of Common Stock Outstanding, Each