Question
Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 4.00%, the company's credit risk premium is 4.10%, the domestic beta is estimated
Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 4.00%, the company's credit risk premium is 4.10%, the domestic beta is estimated at 1.09 the international beta is estimated at 0.85, and the company's capital structure is now 70% debt. The before-tax cost of debt estimated by observing the current yield on Ganado's outstanding bonds combined with bank debt is 7.90% and the company's effective tax rate is 35%.
Calculate both the CAPM and ICAPM weighted average costs of capital for the following equity risk premium estimates.
a. 8.10%
b. 7.10%
c. 5.30%
d. 4.20%
a. Using the domestic CAPM, what is Ganado's weighted average cost of capital if the firm's equity risk premium is 8.10%?
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