Estimating the Cost of Capital.

Estimate Targets (NYSE: TGT) weighted average cost of capital (WACC) by following the instructions below. a) Estimate the cost of equity using the Capital Asset Pricing Model (CAPM). Justify your choice of risk-free rate. Use a historical market risk premium estimate and justify your choice.

b) Estimate the cost of debt using a spread approach, assuming an average debt maturity of 10 years.

c) Estimate the following capital structure ratios, where value (V) = equity (E) + debt (D). i) Equity-to-value (E/V) ii) Debt-to-value (D/V), where debt = current portion of long-term debt + long-term debt. It is best to use market value rather than book value of debt; you may assume that debt market value = 0.91 times book value. (0.91 is the recent ratio of the weighted average market price of Targets outstanding debt relative to its book value.) d) What is your resulting estimate of Targets WACC, incorporating the weights and costs of equity and debt capital computed in the preceding steps?