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Unformatted text preview: ia, “Aloha,” http://en.wikipedia.org/wiki/Aloha Page 2 <ii> : Debt portion in the capital structure = ! !!! = \$",!"# !"##"\$%& \$"#,!!".! !"##"\$%& ! \$",!"# !"##"\$%& = 29.31% And since the company capital structure consist of only debt and equity, the equity portion ( ! !!! ) is the remaining portion which account for: 100% - 29.31% = 70.69%. < i ii> : CAPM equation: r! = r! + β r! − r! The questions assumed risk free rate equal to the short- term treasury bill rate (r! = 3.5%), Beta and market return are given by the questions (β = 0.66, r! = 12%, respectively.) Substituing these value in we get; Cost of equity or expected return (r! ) = 3.5% + 0.66(12% – 3.5%) = 9.11% <iv > : The problem sheet attachment gave us an information on the cost of debt (i.e. “New issue rate for Phillips assuming straight long- term debt” r! = 7.4%) as well as information on tax rate (i.e. "Marginal tax rate" T = 35%). With all the information in hand, we can determine post- tax weighted ave...
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