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What is cost of equity capital for entertainment corporation

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Reference no: EM132639538

Entertainment Corporation is considering a project for the coming year that will require an investment cost of P100 Mln. The company plans to finance the project by a combination of debt and equity, as follows:

  • Issue P20 Mln of 10-year bonds at a price of 102, with an interest rate of 10% and flotation cost of 3% of par.
  • Use P80 Mln of funds generated from earnings retained in the business.

The expected market rate of return is 14%. The current rate of treasury bills is 8%. The beta coefficient for Entertainment Corporation is 1.2. The corporate income tax rate is 32%.

Question A. What is the effective rate of interest of the bonds?

Question B. What is the after-tax effective cost of bonds?

Question C. Using the Capital Asset Pricing Model (CAPM), what is the cost of equity capital for Entertainment Corporation?

Question D. Assume that the after-tax cost of debt is 7% and the cost of equity capital is 15%, what is the weighted average cost of capital (WACC) for Entertainment Corporation's project?

Reference no: EM132639538

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