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Please refer to previous question I posted.

What is an appropriate required rate of return (hurdle rate) for Food Products and Instruments? How did you get it? (Hints: you may want to use the capital asset pricing model (CAPM) to estimate the cost of equity This was the answer is was given. The required rate of return or hurdle rate for Food Products and Instruments or any division or firm is the minimum rate that the firm is expected to earn while taking the project, It can generally be determined through the CAPM model: Cost of Equity = Risk free rate + Beta * Risk Premium WACC (Hurdle Rate) = D/D+E * Cost of after tax debt + E/D+E * Cost of Equity D/E Ratios can be calculated by dividing debt to equity. The values can be taken by the firm's annual sheet or management discussions only. The value for this is available at various financial sites as well. Hurdle Rate for food products = D/D+E * Cost of after tax debt + E/D+E * Cost of Equity = 0.6 * 2.2 + 0.4 * 4.8 = 1.32 + 1.92 = 3.24 Hurdle Rate for Instruments = D/D+E * Cost of after tax debt + E/D+E * Cost of Equity = 0.4 * 2.2 + 0.46* 9.4 = 0.88 + 5.64 = 6.52 please explain how these numbers came to be. I have worked them every way possible in my notes.

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Deanna Hettinger
Deanna HettingerLv2
28 Sep 2019

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What is an appropriate required rate of return (hurdle rate) for Food Products and Instruments? How did you get it? (Hints: you may want to use the capital asset pricing model (CAPM) to estimate the cost of equity)

Chestnut Foods Estimation of WACC for Chestnut Foods (year-end 2013) Chestnut Foods Hurdle Rate as of December 2013: 7.0% Chestnut uses a hurdle rate that reflects prevailing rates of return in financial markets using a weighted average of both debt and equity securities. The current mix of debt and equity in Chestnut’s capital structure on a market-value basis is 20% debt and 80% equity. The prevailing yield on debt of similar credit risk is estimated at 3.5%. Based on a marginal corporate tax rate of 37%, the after-tax cost of debt is 2.2%. The cost of equity for Chestnut is estimated at 8.2% based on the CAPM with a beta of 0.9, a market risk premium of 6.0%, and a risk-free rate of 2.8%.* Based on these estimates, the WACC is 7.0%. * An alternative model that uses a market risk premium of 9% and a risk-free rate of 0.1% gives a similar cost-of-equity estimate. PLEASE CLARIFY HOW TO GET D/E RATIOS. `WACC Food Processing market risk premium 9% risk-free rate 0.1% debt ratio 60% equity ratio 40% tax rate 37% cost of debt 2.20% cost of equity 4.8% WACC 3.22%

Instruments market risk premium 9% risk-free rate 0.1% debt ratio 40% equity ratio 60% tax rate 37% cost of debt 2.20% cost of equity 9.4% WACC 6.52%

This question is a bit confusing, can anyone help explain?

Question: "A well-known piano manufacturer wishes to expand inChina. It decides that 80% of the $32 million it needs will comefrom debt, and the remaining 20% from selling equity. The cost ofdebt is 7% and the corporate tax is 35%. To estimate the cost ofequity, the firm uses the CAPM with these parameters: equation

o What is the WACC, or hurdle rate, of the investment?

o If the IRR of the investment is estimated at 7 %, should itproceed?

Match the Weighted Average Cost of Capital to each of the scenarios given for ABC Corporation.

- A. B. C. D. E.

Target capital structure: 64% debt, 8% preferred stock and 28% common equity. Yield to maturity on bonds: 4.0%; Preferred stock dividend: $7.44 per year; current market price of preferred stock is $69.94. CAPM data for common equity: risk-free rate is 3.3%; market risk premium for the average stock is 5.6%; ABC has a beta of 1.88. ABC's marginal tax rate is 40%.
- A. B. C. D. E.

Target capital structure: 71% debt, 6% preferred stock and 23% common equity. Yield to maturity on bonds: 8.8%; Preferred stock dividend: $6.25 per year; current market price of preferred stock is $68.75. CAPM data for common equity: risk-free rate is 4.9%; market risk premium for the average stock is 7.5%; ABC has a beta of 0.92. ABC's marginal tax rate is 40%.
- A. B. C. D. E.

Target capital structure: 59% debt, 9% preferred stock and 32% common equity. Yield to maturity on bonds: 6.2%; Preferred stock dividend: $6.07 per year; current market price of preferred stock is $68.57. CAPM data for common equity: risk-free rate is 3.4%; market risk premium for the average stock is 9.9%; ABC has a beta of 0.82. ABC's marginal tax rate is 40%.
- A. B. C. D. E.

Target capital structure: 69% debt, 7% preferred stock and 24% common equity. Yield to maturity on bonds: 8.6%; Preferred stock dividend: $6.14 per year; current market price of preferred stock is $68.64. CAPM data for common equity: risk-free rate is 3.3%; market risk premium for the average stock is 10.5%; ABC has a beta of 0.79. ABC's marginal tax rate is 40%.
- A. B. C. D. E.

Target capital structure: 51% debt, 12% preferred stock and 37% common equity. Yield to maturity on bonds: 5.3%; Preferred stock dividend: $6.71 per year; current market price of preferred stock is $69.21. CAPM data for common equity: risk-free rate is 4.3%; market risk premium for the average stock is 4.5%; ABC has a beta of 1.84. ABC's marginal tax rate is 40%.
A.

7.44%
B.

7.01%
C.

6.97%
D.

6.26%
E.

6.68%

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