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question 1

Multiple Choice

$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ FM Foods, Inc.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Facts and assumptions as of Dec. 31, 2011
$\begin{array}{lr}\hline \text { Yield to maturity on long-term government bonds } & 4.4 \% \\\text { Yield to maturity on company long-term bonds } & 6.3 \% \\\text { Coupon rate on company long-term bonds } & 7.0 \% \\\text { Historical excess return on common stocks } & 6.5 \% \\\text { Company equity beta } & 1.20 \\\text { Stock price } & \$ 40.00 \\\text { Number of shares outstanding (millions) } & 240 \\\text { Book value of equity (millions) } & \$ 5,240 \\\text { Book value of interest-bearing debt (millions) } & \$ 1,250 \\\text { Tax rate } & 35.0 \% \\\hline\end{array}$
-Please refer to the information for FM Foods above.Estimate FM's after-tax cost of equity capital.

• A) 4.50%
• B) 6.92%
• C) 7.93%
• D) 12.20%
• E) 17.48%

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Definitions:

Tax Rate

The proportion of tax that an individual or business must pay on their earnings.

ROE

Return on Equity; a measure of the profitability of a business in relation to the equity, calculated as net income divided by shareholder equity.

Assets

Resources owned by a company that have economic value and can be converted into cash, including but not limited to property, plant, equipment, and intellectual property.

D/A

Debt-to-Assets ratio, a financial metric indicating the proportion of a company's assets that are financed by debt.