Dreamtimes, Inc. is a pharmaceutical company with 100 million shares trading at $10/share and debt outstanding...

Dreamtimes, Inc. is a pharmaceutical company with 100 million shares trading at $10/share and debt outstanding of $ 250 million. The firm has a levered beta of 1.00 and a pre-tax cost of debt of 4.5%. The risk-free rate is 3.5%, the marginal tax rate is 40% and the equity risk premium is 5%.

What is the cost of equity capital?

Expert Solution

COST OF EQUITY CAPITAL

CAPITAL ASSET PRICING MODEL(CAPM)

Ke=Rf + β ( Rm-Rf)

Ke= 3.5 % + 1(5%)

Ke =8.5%

NOTE

Rf =risk free rate of return =3.5%

β = Beta factor = 1.00

Rm = return on market portfolio

Rm-Rf = equity risk premium or stock market risk premium =5%

ekkarill92 answered 3 years ago

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