Capital Asset Pricing Model

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Reference no: EM133208455

Pavcher, Inc. Is considering a project for next year, Which will cost $5 million. Daveher plans to use the following combination of debt and equity to finance the investment. Issue $1.5 million of 10- year bonds at a price of 101, with a coupon/contract rate of 4%, and flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings.

The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The peta coefficient for Davcher, Inc. is estimated to be .70. Davcher is subject to an effective corporate income tax rate of 30 percent.

Compute Davcher's expected rate of return using the Capital Asset Pricing Model (CAPM).

Reference no: EM133208455

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