Question
Estimating Components of both WACC and DDM An analyst estimates the cost of debt capital for Abbott Laboratories is 3.0% and that its cost of
Estimating Components of both WACC and DDM An analyst estimates the cost of debt capital for Abbott Laboratories is 3.0% and that its cost of equity capital is 5.0%. Assume that ABT's statutory tax rate is 21%, the risk-free rate is 2.1%, the market risk premium is 5%, the ABT market price is $84.10 per common share, and its dividends are $1.28 per common share. (a) Compute ABT's average pretax borrowing rate and its market beta. (Round your answers to one decimal place.) Average borrowing rate = Answer 1
% Market beta = Answer 2
(b) Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model to infer the market's expected cost of equity capital. (Hint: Use Price per share = Dividends per share/Cost of equity capital.) (Round your answer to one decimal place.)
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