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Estimating Components of both WACC and DDM Analysts estimate the cost of debt capital for Abbott Laboratories ( NYSE: ABT ) is 2 . 3

Estimating Components of both WACC and DDM
Analysts estimate the cost of debt capital for Abbott Laboratories (NYSE: ABT) is 2.34% and that its cost of equity capital is 4.1%. Assume that ABT's marginal tax rate is 36%, the risk-free rate is 5.5%, the market risk premium is 5.9%, the ABT market price is $47.73 per common share, and its dividends are $1.26 per common share.
(a) Compute ABT's average borrowing rate and its market beta. (Round your answers to one decimal place.)
Average borrowing rate =
%
Market beta =
(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.)
%
(c) Compare the inferred cost of equity capital from part (b) to the 4.1% estimated cost of equity capital from analysts.
The inferred cost of equity capital seems high compared to 4.1%, which suggests that the investment has a negative beta.
The inferred cost of equity capital seems low compared to 4.1%, which suggests that the investment has a positive beta.
The inferred cost of equity capital seems high compared to 4.1%, which suggests that the investment has a positive beta.
he inferred cost of equity capital seems low compared to 4.1%, which suggests that the investment has a negative beta.
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