Items 1 and 2 are based on the following information:
DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment.
- Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 2% of par.
- Use $35 million of funds generated from earnings.
The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%.
Assume that the after-tax costs of debt is 7% and the cost of equity is 12%. Determine the weighted-average cost of capital.
- 10.50%
- 8.50%
- 9.50%
- 6.30%
The Capital Asset Pricing Model (CAPM) computes the expected return on a security by adding the risk-free rate of return to the incremental yield of the expected market return that is adjusted by the company’s beta. Compute DQZ’s expected rate of return.
- 9.20%
- 12.20%
- 7.20%
- 12.00%