Risk and the Cost of the Capital The McGregor company has the following capital structure information: Source of fund ß Market value ($mil) Book value ($mil) Debt 0 100 100 Preferred Equity 0.3 50 50 Ordinary Equity 1.2 200 150 The current risk-free rate on the market is 3% and the current market risk premium is 5%. Let assume there is no corporate tax.
McGregor has changed its assessment for the project described in part 2. They ignore the chance of failure regarding the cash flows and assume that the project would have the average risk of the company’s other investments. However, they would like to uncover what they are really assuming by using the Certainty Equivalent Cash Flow (CEQ) approach. As an analyst in the company, you are required to work out the CEQ, and deduction for riskalong with the project life, and then give adviceso that the top managers can assess.
