1. (15 points) Cost of Capital: A consumer products firm has asked you to help them estimate the cost of capital for a project they are considering in the retail clothing business. To do this you gather the following information on the market, the firm, and a portfolio of firms operating in the retail clothing industry. The corporate tax rate, tc = 30%. Market Conditions Consumer Products firm Retail Clothing Industry BE = 1.05 BD = 0.125 BE = 1.65 BD = 0.313 E(MRP) = 8% D/V = 0.15 Id=5.0% D/V = 0.45 ID = 6.5% IF = 4% a. c. (2 pts) Determine the current WACC for the consumer products firm (prior to any new investment). b. (4 pts) Using the information you obtained for from the retail clothing industry portfolio, provide an estimate of the opportunity cost of assets, IA, for investments in this industry. (4 pts) Assuming that following any investment in the retail clothing business the consumer products firm would maintain its current D/V ratio as well as its current in and Bp, determine the required return on equity TE, for an investment in retail clothing by this consumer products firm. d. (2 pts) Determine the WACC the consumer products firm would use to value its investment in the retail clothing business assuming it maintains its current D/V ratio for these new investments. 1. (15 points) Cost of Capital: A consumer products firm has asked you to help them estimate the cost of capital for a project they are considering in the retail clothing business. To do this you gather the following information on the market, the firm, and a portfolio of firms operating in the retail clothing industry. The corporate tax rate, tc = 30%. Market Conditions Consumer Products firm Retail Clothing Industry BE = 1.05 BD = 0.125 BE = 1.65 BD = 0.313 E(MRP) = 8% D/V = 0.15 Id=5.0% D/V = 0.45 ID = 6.5% IF = 4% a. c. (2 pts) Determine the current WACC for the consumer products firm (prior to any new investment). b. (4 pts) Using the information you obtained for from the retail clothing industry portfolio, provide an estimate of the opportunity cost of assets, IA, for investments in this industry. (4 pts) Assuming that following any investment in the retail clothing business the consumer products firm would maintain its current D/V ratio as well as its current in and Bp, determine the required return on equity TE, for an investment in retail clothing by this consumer products firm. d. (2 pts) Determine the WACC the consumer products firm would use to value its investment in the retail clothing business assuming it maintains its current D/V ratio for these new investments
