Question

It is 1 January 1997. Normal America, Inc. (NA) has paid a year-end dividend in each of the last 10 years, as shown by the table below: FIGURE CANT COPY a. Calculate NA's $\beta$ with respect to the $S \& P 500$. b. Suppose that the Treasury bill rate is $5.5 \%$ and that the expected return on the market is $E\left(r_M\right)=13 \%$. If the corporate tax rate $T_C=35 \%$, calculate NA's cost of equity using both the classic CAPM and tax-adjusted model. c. Assume that NA's cost of debt is $8 \%$. If the company is financed by $1 / 3$ equity and $2 / 3$ debt, what is its weighted average cost of capital using each of the two CAPM models?

   It is 1 January 1997. Normal America, Inc. (NA) has paid a year-end dividend in each of the last 10 years, as shown by the table below:
FIGURE CANT COPY
a. Calculate NA's $\beta$ with respect to the $S \& P 500$.
b. Suppose that the Treasury bill rate is $5.5 \%$ and that the expected return on the market is $E\left(r_M\right)=13 \%$. If the corporate tax rate $T_C=35 \%$, calculate NA's cost of equity using both the classic CAPM and tax-adjusted model.
c. Assume that NA's cost of debt is $8 \%$. If the company is financed by $1 / 3$ equity and $2 / 3$ debt, what is its weighted average cost of capital using each of the two CAPM models?

Financial Modeling

imon Benninga 4th Edition

Chapter 3, Problem 10

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Step 1

- To calculate the beta ($\beta$) of Normal America, Inc. (NA) with respect to the S&P 500, you would typically use regression analysis on the historical returns of NA against the historical returns of the S&P 500. However, since the actual return data is not Show more…

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It is 1 January 1997. Normal America, Inc. (NA) has paid a year-end dividend in each of the last 10 years, as shown by the table below: FIGURE CANT COPY a. Calculate NA's $\beta$ with respect to the $S \& P 500$. b. Suppose that the Treasury bill rate is $5.5 \%$ and that the expected return on the market is $E\left(r_M\right)=13 \%$. If the corporate tax rate $T_C=35 \%$, calculate NA's cost of equity using both the classic CAPM and tax-adjusted model. c. Assume that NA's cost of debt is $8 \%$. If the company is financed by $1 / 3$ equity and $2 / 3$ debt, what is its weighted average cost of capital using each of the two CAPM models?

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