Question
Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.30%, the company's credit risk premium is 3.70%, the domestic beta is estimated
Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.30%, the company's credit risk premium is 3.70%, the domestic beta is estimated at 1.17, the international beta is estimated at 0.96, and the company's capital structure is now 55% debt. The before-tax cost of debt estimated by observing the current yield on Ganado's outstanding bonds combined with bank debt is 7.70% and the company's effective tax rate is 40%. Calculate both the CAPM and ICAPM weighted average costs of capital for the following equity risk premium estimates.
a. 8.80%
b. 7.70%
c. 5.70%
d. 4.70%
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