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Week 6 Individual Assignment
FIN 508 – Financial Management
Dr. Kallianiotis
Maria G Danylak
Due Sunday, December 1, 2019
13.1, 13.2, 13.10, 13.15
13.1 Calculating Cost of Equity
The Nixon Corporation common stock has a beta of .95. If the risk-free rate is 2.7 percent and the expected return
on the market is 10 percent, what is the company’s cost of equity capital?
RS = RF + β * (RM-RF)
Where RF=risk-free rate, RM-RF=difference between the expected return on the market portfolio and the riskless
rate (market risk premium)
RS = 2.7% + .95 * (10%-2.7%)
= 2.7% + .95 * (7.3%)
= 2.7% + 6.935%
= 9.635%
13.2 Calculating Cost of Debt
One Step, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 17 years maturity
that is quoted at 95 percent of face value. The issue makes semiannual payments and has a coupon rate of 6
percent. What is the company’s pretax cost of debt? If the tax rate is 21 percent, what is the after-tax cost of debt?
