Daimler Chrysler AG manufactures automobiles and trucks. IBM develops and manufactures computer hardware and offers related technology services. Target Stores operates a chain of general merchandise discount retail stores. Selected data for these companies appear in the following table (amounts in millions):

Required
a. The intermediate-term yields on U.S. government Treasury securities have recently been around 4.0 percent. Assume that the market risk premium is 5.0 percent. Compute the cost of equity capital for each of these three companies.
b. Compute the weighted average cost of capital for each of the three companies. For each firm, assume that the market value of the debt equals its book value.
c. Compute the unlevered market (asset) beta for each of the three companies. For each firm, assume that the market value of the debt equals its book value.
d. Assume for this part that each company is a potential leveraged buyout candidate. The buyers intend to implement a capital structure that has 75 percent debt (with a pretax borrowing cost of 8.0 percent) and 25 percent common equity. Compute the weighted average cost of capital for each company based on the new capital structure. To what extent do these revised weighted average costs of capital differ from those computed in part b?

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Daimler-Chrysler IBM Target Stores $247,334 $109,183$32,293 $103,728 22,927 $ 9,538 5.696 Average Pretax Borrowing Cost Common Equity: 5.2% 2.5% $13,029 $46,520 35.0% 0.89 35.0% 1.61 35.096 1.07