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3. Suppose General Motors managers would like to invest in a new production line and must determine a cost of capital for the investment. The
3. Suppose General Motors managers would like to invest in a new production line and must determine a cost of capital for the investment. The beta for GM with respect to the US equity market is 1.185, and its beta with respect to the world equity market is 1.02, the beta for the automobile industry with respect to the US equity market is 0.97, the US equity risk premium is 7.4%, the equity premium on the world market is assumed to be 6%, and the risk-free rate is 3%. Propose a range of cost-of-equity estimates to consider in the analysis. Which additional data do you need to get the WACC? Explain why an individual company's beta may be different from the industry's beta.
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