Peter, the financial manager of ULtd., is trying to determine the company’s cost of capital.
Currently, there are 10 million sharesof common stock and 0.5 million zero coupon bonds outstanding (parvalue $1,000 each). The stock price is $10 and the bond price is$456. The bonds have 20 years to maturity. The expected return ofmarket portfolio can be estimated using the average historicalreturn (over the past four years). T-bills are yielding 2%. The taxrate is 30%. Given the following historical returns:
|
Year |
U |
Market Porfolio |
|
2012 |
10% |
15% |
|
2011 |
15% |
18% |
|
2010 |
2% |
3% |
|
2009 |
-8% |
-10% |
What
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