Question
Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.70%, 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 3.70%, the company's credit risk premium is 4.10%, the domestic beta is estimated at 0.93, the international beta is estimated at 0.66, and the company's capital structure is now 65% debt. The before-tax cost of debt estimated by observing the current yield on Ganado's outstanding bonds combined with bank debt is 8.60% and the company's effective tax rate is 39%. Calculate both the CAPM and ICAPM weighted average costs of capital for the following equity risk premium estimates.
a. 8.40%
b. 7.50%
c. 5.50%
d. 4.50%
a. Using the domestic CAPM, what is Ganado's weighted average cost of capital if the firm's equity risk premium is 8.40%?
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