Cost of Capital-Related Equations

1. NANO Corp's target capital structure weights are 50% long term debt, 10% preferred stock, and 40% common equity. The before-tax cost of debt is estimated to be 8% and the company is in the 40% tax bracket. With 5% expected constant dividend growth rate, NANO distributed $5 preferred dividend per share when the market price is $50 per share. The current risk-free interest is 6% on Treasury Bills. The expected return on the market is 14% and the firm's [3 is 1.5. (60 points) a) Compute the cost of debt, cost of preferred stock and cost of common equity b) What is NANO's required return on common equity using the security market line (also known as Capital appreciation Pricing Model-CAPM)? c) Calculate the after-tax weighted average cost of capital (WACC) for NANO. Is WACC higher than the cost of debt, cost of preferred stock, or cost of common equity? d) If the Tax Rate is dropped to 20%, what is the new WACC?. What kind of impact does tax has on the WACC? 2 . Capital Asset Pricing Model (CAPM) provides a formula that calculates the expected return on a security based on its level of risk. The formula for the capital asset pricing model is the risk free rate plus beta times the difference of the return on the market and the risk free rate. Please answer the following Questions (40 points) a) Expected Equity Market Return, Rm is 14%, Risk Free Return, Rf is 5%. What is the required return R for a stock with 13 of 1.8? b) In the above problem, If the required return R is 12%, What is the value of (r What is your comment on the value of the 13 if you are a risk averse investor? c) Impacted by the political risk the required return R dropped to4%. Compute the value of [3 using the data given in part a). What is your conclusion about the new [3? d) Identify the [3 of your favorite publicly traded corporation in any US stock exchange. How is this [3 compared to the one computed in C    

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