Data: RF = 4% Market Risk Premium = 6%
GeKay Inc. is an all-equity firmwith an equity beta of 0.4 and yearly EBIT of $1,000,000 that is expected to continue "forever" (in perpetuity).All purchases and sales are in cash and there is no depreciation.
All earnings are paid out as dividends. GeKay has 100,000 shares of common stock outstanding, and pays taxes at the (marginal) rate of 36%. Suppose we are in an M&M (Miller and Modigliani) world with taxes- but note that CAPM does apply.
1. What is GeKay's cost of equity?
2. Determine GeKay's stock price?