Question

The following data pertains to Xena Corp.: Xena Corp. Total Assets $23,610 Interest-Bearing Debt (market value) $11,070 Average borrowing rate for debt 10.2% Common Equity: Book Value $ 6,150 Market Value $25,830 Marginal Income Tax Rate 37% Market Beta 1.73 Assuming that the risk-free rate is 4.5% and the market risk premium is 6.2%, calculate Xena's cost of equity capital using the capital asset pricing model. Select one: A. 15.2% B. 10.4% C. 13.4% D. 8.9%

Answer 1

Answer:

Option (A).

Explanation:

According to the scenario, computation of the given data are as follow:-

We can calculate the cost of equity capital by using following formula:-

Market Beta = 1.73

Risk free rate = 4.50% = 0.045

Market risk premium = 6.20% = 0.062

Cost of Equity Capital = (Market Risk Premium × Market Beta ) + Risk Free Rate

= (0.062 × 1.73) + 0.045

= 0.1073 + 0.045

= 0.1523 or 15.23%