Question
Kashmiri is the largest and most successful specialty goods company based in Bangalore, India. It has not yet entered the North American marketplace, but is
Kashmiri is the largest and most successful specialty goods company based in Bangalore, India. It has not yet entered the North American marketplace, but is considering establishing both manufacturing and distribution facilities in the United States through a wholly owned subsidiary. It has approached two different investment banking advisors, Goldman Sachs and Bank of New York, for estimates of what its costs of capital would be several years into the future when it planned to list its American subsidiary on a U.S. stock exchange. Using the assumptions by the two different advisors in the table below, calculate the prospective costs of debt, equity, and the WACC for Kashmiri (U.S.).
Assumptions | Goldman Sachs | Bank of New York |
| ||
Estimate of correlation between security and market | 0.90 | 0.85 | |||
Estimate of standard deviation of Kashmiri's returns | 24.0% | 30.0% | |||
Estimate of standard deviation of market's return | 18.0% | 22.0% | |||
Risk-free rate of interest | 3.0% | 3.0% | |||
Estimate of Kashmiri's cost of debt in U.S. market | 7.5% | 7.8% | |||
Estimate of market return, forward-looking | 9.0% | 12.0% | |||
Corporate tax rate | 35% | 35% | |||
Proportion of debt | 35% | 40% | |||
Proportion of equity | 65% | 60% |
What is the after-tax cost of debt estimated by Goldman Sachs for Kashmiri?
What is the after-tax cost of debt estimated by Bank of New York for Kashmiri?
What is the cost of equity estimated by Goldman Sachs for Kashmiri?
What is the cost of equity estimated by Bank of New York for Kashmiri?
What is the WACC estimated by Goldman Sachs for Kashmiri?
What is the WACC estimated by Bank of New York for Kashmiri?
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