A security analysts report issued by a national brokerage

Question

Sea Ready Transport, Ltd., operates a fleet of oil and chemical tankers. A security analyst's Report issued by a national brokerage firm indicates that debt yielding 11%, comprises 40% of Sea Ready's overall capital structure.

There is a 7% return currently available on risk-free securities (R_F) and the 11% expected market return (k_M) and the company's estimated beta (b) of 1.5.

a. Calculate Sea Ready's component cost of equity using the capital asset pricing model (CAPM):

k_e = R_F + b(k_M - R_F)

b. Assuming a 40% tax rate, calculate Sea Ready's weighted average cost of capital (WACC).