The common stock of ABC has a beta of 1.20. The risk-free rate is 5 percent, and the market risk premium (Km - Krf) is 6 percent. This year's addition to retained earnings is $3,000,000. The company's capital budget is $4,000,000 and its target capital structure is 50 percent debt and 50 percent equity.
How large of a capital budget can the company have without resorting to the issuance of additional common stock or changing its capital structure?
What is the company's cost of equity capital?
Target capital structure = 50% debt
Retained earnings for the ...
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