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2) Cost of Capital (25 points]: You are estimating the cost of equity capital for a firm with three business units (service, manufacturing and tech).
2) Cost of Capital (25 points]: You are estimating the cost of equity capital for a firm with three business units (service, manufacturing and tech). You are comfortable with the assumptions that the service unit industry's unlevered beta = 0.721, and the manufacturing unit industry's unlevered beta = 1.219. However, you must find good comparable companies in the tech industry that best match the riskiness of the tech business unit. I have provided the best comps' information below. You intelligently estimate that the service business unit will comprise of 44% of the firm's overall value, and the manufacturing unit will comprise of 18% of the firm's overall value (therefore, the tech unit will comprise of 38% of the firm's overall value). Further, the overall firm plans to target a debt-to-value (D/(D+E)) ratio of 27%. The firm's marginal tax rate = 23%. Other potentially useful information is that the relevant risk-free rate = 1.92%, the cost of debt capital = 5.69%, and the market risk premium = 5.10%. Given the information, what is the estimated cost of equity capital for the entire firm? Tech Business Unit Comparable Companies Bobserved D/E Tax Rate Comp A 1.221 0.229 20% Comp B 1.086 0.072 22% Comp C 1.387 0.486 21% 2) Cost of Capital (25 points]: You are estimating the cost of equity capital for a firm with three business units (service, manufacturing and tech). You are comfortable with the assumptions that the service unit industry's unlevered beta = 0.721, and the manufacturing unit industry's unlevered beta = 1.219. However, you must find good comparable companies in the tech industry that best match the riskiness of the tech business unit. I have provided the best comps' information below. You intelligently estimate that the service business unit will comprise of 44% of the firm's overall value, and the manufacturing unit will comprise of 18% of the firm's overall value (therefore, the tech unit will comprise of 38% of the firm's overall value). Further, the overall firm plans to target a debt-to-value (D/(D+E)) ratio of 27%. The firm's marginal tax rate = 23%. Other potentially useful information is that the relevant risk-free rate = 1.92%, the cost of debt capital = 5.69%, and the market risk premium = 5.10%. Given the information, what is the estimated cost of equity capital for the entire firm? Tech Business Unit Comparable Companies Bobserved D/E Tax Rate Comp A 1.221 0.229 20% Comp B 1.086 0.072 22% Comp C 1.387 0.486 21%
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