Answered step by step
Verified Expert Solution
Question
1 Approved Answer
No Time , Please help You are trying to estimate the cost of capital for La Coste, an upscale specialty retailer. The firm is in
No Time , Please help
You are trying to estimate the cost of capital for La Coste, an upscale specialty retailer. The firm is in only one business, specialty retailing; comparable firms have an average published beta of 1.15, an average debt ratio of 30% and an average tax rate of 40%. The firm has provided you with the following information:
The regression beta is 0.75 with a standard error of 0.5.
The firms bonds are rated A, and the default spread for A rated bond is 0.02. The company plans to maintain its current debt ratio of 20%.
The Treasury bond rate is 0.062 and the equity risk premium is 0.064.
The tax rate for La Coste is 40%.
What is the average unlevered beta for the comparable firms?
Answer for part 1
Estimate La Coste's beta based upon the comparable firms (i.e. Bottom up beta)
Answer for part 2
What is La Coste's before tax cost of debt?
Answer for part 3
What is La Coste's after tax cost of debt?
Answer for part 4
Use beta calculated in part two to calculate La Coste's cost of equity?
Answer for part 5
What is the WACC?
Answer for part 6
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started