Question
Ganado's Cost of Capital.Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.70%, the company's credit risk premium is 4.50%, the domestic
Ganado's Cost of Capital.Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be
3.70%,
the company's credit risk premium is
4.50%,
the domestic beta is estimated at
0.96,
the international beta is estimated at
0.72,
and the company's capital structure is now
40%
debt. The expected rate of return on the market portfolio held by awell-diversified domestic investor is
9.80%
and the expected return on a larger globally integrated equity market portfolio is
8.70%.
The before-tax cost of debt estimated by observing the current yield on Ganado's outstanding bonds combined with bank debt is
8.10%
and the company's effective tax rate is
42%.
For both the domestic CAPM and ICAPM, calculate thefollowing:
a. Ganado's cost of equity
b. Ganado's after-tax cost of debt
c. Ganado's weighted average cost of capital
a. Using the domestic CAPM, what is Ganado's cost of equity?
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