Company | Sales in Millions ($) | Market Value Equity in Millions ($) | Market Value Debt in Millions ($) | Equity Beta | Tax Rate (%) | Share Price ($) |
Relevant Ltd. | 752 | 3,800 | 0.0 | 1.702 | 23 | 42 |
ABJ Inc. | 843 | 2,150 | 6.5 | 2.800 | 23 | 24 |
Opus Software Pvt. Ltd. | 211 | 972 | 13.0 | 3.400 | 23 | 13 |
Duarte uses the information from the preliminary prospectus for TagOn’s initial offering. The company intends to issue 1 million new shares. In his conversation with the investment bankers for the deal, he concludes the offering price will be between $7 and $12. The current capital structure of TagOn consists of a $2.4 million five-year noncallable bond issue and 1 million common shares. The following table includes other information that Duarte has gathered:
Currently outstanding bonds | $2.4 million five-year bonds, coupon of 12.5% paying semi-annually with a market value of $2.156 million |
Risk-free rate of interest | 5.25% |
Estimated equity risk premium | 7% |
Tax rate | 23% |
The marginal cost of capital for TagOn, based on an average asset beta of 2.27 for the industry and assuming that new stock can be issued at $8 per share, is closest to:
- 20.5%.
- 21.0%.
- 21.5%.
ans is 21.5
how ? i got the answer as 21.14%