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%.

Question

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%.