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The market situation: The risk-free rate is 5% and the market risk premium is 8%. The firm’s corporate tax rate is 35%. The firm has a beta of 1.10.
Common Stock is listed on the balance sheet of this company at $25 million. The Total Retained Earnings (meaning RE + Additions to Retained Earnings) is listed on the balance sheet as $50 million.
Long-term Debt consists of one outstanding bond issue with a face value of $75 million dollars, an 8 percent coupon rate and it sells for 93 percent of par.
A proposed project has expected cash inflows of year 1, $30,000; year 2, $40,000; year 3, $30,000 and year 4, $40,000. There is no residual value at the end of year 4.
What is the cost of equity using the CAPM?
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