The following data pertains to Zolar Corp a manufacturer of

The following data pertains to Zolar Corp, a manufacturer of ball bearings (dollar amounts in millions). Total Assets Interest-Bearing Debt Average Pre-tax borrowing cost Common Equity $6.840 $3.562 11.5% Book Value $2,560 $12.850 35% 1.24 Market Value ncome Tax Rate Market Equity Beta Assuming that riskless rate is 4.2% and the market premium is 6.2%, calculate Zolar\'s cost of equity capital (ie, the required rate of return on equity): 10.4% 2.0% 7.69% 11.89%

Solution

ANSWER

?Cost of Equity = Riskfree Rate + (Market Equity Beta * Market Premium)

= 4.2 % + ( 1.24 * 6.2 )

= 4.2 % + 7.69 %

= 11.89 %

ie option (d)