Question7 6 p The following data pertains to Zolar Corp a ma

Question7 6 p 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 Market Value $12,850 Income Tax Rate 35% Market Equity Beta 1.24 Assuming that riskless rate is 42% and the market premium is 6.2%, calculate Zolar\'s cost of equity capital ie. the required rate of return on equity; 104% 2.0% ? 7.69% IEF 11.89%

Solution

Given Data:

Risk Free Rate (R_f)= 4.2%

Market Premium (R_m-R_f)= 6.2%

Market Equity Beta = 1.24

Now,

Using Capital Assets Pricing Model,

Cost of Equity Capital= R_f+Beta(R_m-R_f)

=4.2+1.24*6.2

=11.89%.

Hence, required rate of return on equity is 11.89%.