Question

McCann Catching, Inc. has 2.00 million shares of stock outstanding. The stock currently sells for $12.85 per share. The firm’s debt is publicly traded and was recently quoted at 89.00% of face value. It has a total face value of $13.00 million, and it is currently priced to yield 8.00%. The risk free rate is 4.00% and the market risk premium is 8.00%. You’ve estimated that the firm has a beta of 1.30. The corporate tax rate is 37.00%.

The firm is considering a $41.22 million expansion of their production facility. The project has the same risk as the firm overall and will earn $11.00 million per year for 8.00 years.

What is the cost of equity?

Answer 1

To calculate the cost of equity for McCann Catching, Inc., we can use the Capital Asset Pricing Model (CAPM):

\[
\text{Cost of Equity} = R_f + \beta (R_m - R_f)
\]

Where:
- \( R_f \) is the risk-free rate
- \( \beta \) is the firm's beta
- \( R_m - R_f \) is the market risk premium

Given values:
- \( R_f = 4.00\% = 0.04 \)
- \( \beta = 1.30 \)
- Market Risk Premium \( (R_m - R_f) = 8.00\% = 0.08 \)

Now, plug in the values into the formula:

\[
\text{Cost of Equity} = 0.04 + 1.30 \times 0.08
\]
\[
= 0.04 + 0.104
\]
\[
= 0.144
\]

Thus, the cost of equity is:

\[
\text{Cost of Equity} = 14.4\%
\]

Thus, the cost of equity for McCann Catching, Inc. is **14.4%**.