Look again at Table 9.1. This time we will concentrate on Burlington Northern. a. Calculate Burlingtons cost
Question:
Look again at Table 9.1. This time we will concentrate on Burlington Northern.
a. Calculate Burlingtons cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How different are your answers? Assume a risk free rate of 3.5 percent and a market risk premium of 8 percent.
b. Can you be confident that Burlingtons true beta is not the industry average?
c. Under what circumstances might you advise Burlington to calculate its cost of equity based on its own beta estimate?
d. Burlington?s cost of debt was 6 percent and its debt-to-value ratio, D/V,?was .40. What was Burlington?s company cost of capital? Use the industry average beta.
Cost Of DebtThe cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...
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Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
