Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A specialty goods company based in India is considering establishing manufacturing facilities in the United States through a wholly owned subsidiary. It has approached two

A specialty goods company based in India is considering establishing manufacturing facilities in the United States through a wholly owned subsidiary. It has approached two different investment banking advisors; Investor advisor A and Investor advisor B for estimates of what its costs of capital would be several years into the future when it planned to list its American subsidiary on a U.S. stock exchange. The following assumptions are provided by the two different advisors:

Assumptions

Investor advisor A

Investor advisor B

Estimated beta:

1.20

1.15

Risk-free rate of interest

2.5%

2.5%

Estimate of Companys cost of debt in US market

7.2%

7.5%

Expected rate of return on market portfolio of stocks

9.5%

12.2%

Corporate tax rate

35.0%

35.0%

Proportion of debt

40%

45%

Proportion of equity

60%

55%

Using the assumptions listed above, calculate for each Investor advisor:

  1. a) the companys cost of equity (2 marks)
  2. b) the companys cost of debt (2 marks)
  3. c) the companys weighted average cost of capital (2 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Bond Portfolio Management

Authors: Frank J. Fabozzi, Lionel Martellini, Philippe Priaulet

1st Edition

0471678902, 9780471678908

More Books

Students also viewed these Finance questions