Ferrari, the famous high-performance automotive group, launched its initial public offering (IPO) on October 20, 2015 Although the share price had initially risen to over 57 per share, by the end of the year it had settled to 48. Ferrari had by Fiat (Italy), and had never calculated its own cost of capital before, one independent of Fiat. It now needed to, and one of its first challenges was estimating its beta. With only two months of trading to base it on, the corporate treasury group had started with what were considered 'comparable firms', which for Ferrari, meant firms in the luxury goods industry, not automotive. Luxury goods were historically less volatile than the market, so the initial guess on Ferran's beta was 0.90. Using the following assumptions, answer the questions. Assumptions Italian risk-free cost of debt in euros (C) Ferrari's cost of debt in euros (C) Italian corporate income tax rate Ferrari's prospective beta Italian equity market risk premium (equity return over risk-free) Ferrari's shares outstanding Ferrari's share price in euros Ferrari's debt outstanding in euros Values 4.00% 3.99% 33.50% 0.90 5.50% 189,000,000 48.00 510,000,000 a. What is Ferrari's cost of debt, after-tax, in euros? b. What is Ferrari's cost of equity in euros? c. What proportion of Ferrari's capital structure is debt? d. What proportion of Ferrari's capital structure is equity? e. What is Ferrari's weighted average cost of capital? Ferrari, the famous high-performance automotive group, launched its initial public offering (IPO) on October 20, 2015 Although the share price had initially risen to over 57 per share, by the end of the year it had settled to 48. Ferrari had by Fiat (Italy), and had never calculated its own cost of capital before, one independent of Fiat. It now needed to, and one of its first challenges was estimating its beta. With only two months of trading to base it on, the corporate treasury group had started with what were considered 'comparable firms', which for Ferrari, meant firms in the luxury goods industry, not automotive. Luxury goods were historically less volatile than the market, so the initial guess on Ferran's beta was 0.90. Using the following assumptions, answer the questions. Assumptions Italian risk-free cost of debt in euros (C) Ferrari's cost of debt in euros (C) Italian corporate income tax rate Ferrari's prospective beta Italian equity market risk premium (equity return over risk-free) Ferrari's shares outstanding Ferrari's share price in euros Ferrari's debt outstanding in euros Values 4.00% 3.99% 33.50% 0.90 5.50% 189,000,000 48.00 510,000,000 a. What is Ferrari's cost of debt, after-tax, in euros? b. What is Ferrari's cost of equity in euros? c. What proportion of Ferrari's capital structure is debt? d. What proportion of Ferrari's capital structure is equity? e. What is Ferrari's weighted average cost of capital
