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Ferrari's IPO and WACC. Ferrari, the famous high-performance automotive group, launched its initial public offering (IPO) on October 20, 2015. Although the share price had initially risen to over 50 euros (E) per share, by the end of the year it had settled to 42 euros () Ferrari had been owned by Fiat (Italy), and had never calculated its own cost of capital before, one independent of Fiat. It now needed to, and one of its first challenges was estimating its beta. With only two months of trading to base it on the corporate treasury group had started with what were considered comparable firms, which for Ferrari, meant firms in the luxury goods industry, not automotive. Luxury goods were historically less volatile than the market, so the initial guess on Ferrari's beta was 0.86. Use the assumptions in the popup table to answer the following questions. a. What is Ferrar's cost of debt, after-tax, in euros? b. What is Ferrari's cost of equity in euros? c. What is Ferrar's market capitalization? d. What is Ferrar's total value of equity outstanding? e. What proportion of Ferrari's capital structure is equity? f. What proportion of Ferrari's capital structure is debt? 9. What is Ferrari's weighted average cost of capital? Data table (Click on the icon to import the table into a spreadsheet.) Component Italian risk free cost of debt in euros (6) Ferrari's cost of debt in euros (6) Italian corporate income tax rato Ferrar's prospective beta Italian equity market risk premium (equity return over risk froe rate) Ferrar's shares outstanding Ferrar's share price in euros Ferrar's debt outstanding in euros Value 4.17% 4.15% 34% 0.86 5.70% 199,000,000 42 467,000,000 Print Done 0% (Round to two decimal places) h. What is Ferraris WACC if its beta was higher like other automotive companies, say 121? WestGas Conveyance, Inc. WestGas Conveyance, Inc., is a large U.S. natural gas pipeline company that wants to raise $120 milion to finance expansion WestGas wants a capital structure that is 50% debt and 50% equity. Its corporate combined federal and state income tax rate is 39% WestGas finds that it can finance in the domestic US capital market at the rates listed in the popup window. Both debt and equity would have to be sold in multiples of $20 million, and these cost figures show the component costs, each of debt and equity if raised 50% by debt and 50% by equity. A london bank advises WestGas that US dollars could be raised in Europe at the following costs, also in multiples of $20 million, while maintaining the 50/50 capital structure. Each increment of cost would be influenced by the total amount of capital raised. That is, if WestGas first borrowed $20 million in the European market at 6% and matched this with an additional $20 million of equity, additional debt beyond this amount would cost 11% in the United States and 9% in Europe. The same relationship holds for equity financing a. Calculate the lowest average cost of capital for each Increment of 540 million of new capital, where WestGas raises $20 million in the equity market and an additional $20 in the debt market at the same time b. If WestGas plans an expansion of only $60 million, how should that expansion be financed? c. What will be the weighted average cost of capital for the expansion? a. If WestGas plans an expansion of $120 million, what is the lowest average cost of capital for the first $40 million of new capital? 5% (Round to two decimal places.) What is the lowest average cost of capital for the second $40 million of new capital? 0% (Round to two decimal places.) What is the lowest average cost of capital for the third $40 million of new capital? % (Round to two decimal places) What will be the weighted average cost of capital for the $120 million expansion? 1 Data table on of new 0 (Click on the icon to import the table into a spreadsheet) Cost of Costs of Raising Capital in the Market Domestic Equity Up to $40 million of new capital 11% 541 million to $80 million of new capital 18% Above 580 million 21% Cost of Domestic Debt 7% 11% 10% Cost of European Equity 13% 17% 22% Cost of European Debt 6% 9% 179 Ganado and Equity Risk Premiums. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.40%, the company's credit risk premium is 4.20%, the domestic beta is estimated at 1.03, the international beta is estimated at 0 69, and the company's capital structure is now 45% debt. The before-tax cost of debt estimated by observing the current yield on Ganado's outstanding bonds combined with bank debt is 8.00% and the company's effective tax rate is 38% Calculate both the CAPM and ICAPM weighted average costs of capital for the following equity risk premium estimates a. 8.30% b.7.20% c. 5.40% d. 4.30% a. Using the domestic CAPM, what is Ganado's weighted average cost of capital if the firm's equity risk premium is 8.30%? % (Round to two decimal places.) Using the ICAPM, what is Ganado's weighted average cost of capital if the firm's equity risk premium is 8.30%? [% (Round to two decimal places.) b. Using the domestic CAPM, what is Ganado's weighted average cost of capital if the firm's equity risk premium is 7 20% % (Round to two decimal places.) Using the ICAPM, what is Ganado's weighted average cost of capital if the firm's equity risk premium is 720%? % (Round to two decimal places.) c. Using the domestic CAPM, what is Ganado's weighted average cost of capital if the firm's equity risk premium is 5.40%? 0% (Round to two decimal places.) Using the ICAPM, what is Ganado's weighted average cost of capitat if the firm's equity risk promium is 5.40%? % (Round to two decimal places) d. Using the domestic CAPM, what is Ganado's weighted average cost of capital if the firm's equity risk premium is 4 30%? [% (Round to two decimal places.) Using the ICAPM what is Ganado's weighted average cost of capital if the firm's equity risk premium is 430%? [(Round to two decimal places) Nestle of Switzerland Revisited. Nestle of Switzerland is revisiting its cost of equity analysis. As a result of extraordinary actions by the Swiss Central Bank, the Swiss bond index yiold (10-year maturity) has dropped to a record low of 0.50%. The Swiss equity markets have been averaging 8 20% returns, while the Financial Times global equity market returns, indexed back to Swiss francs, stands at 8.77%. Nestle's corporate treasury staff has estimated the company's domestic beta at 0.922, but its global beta (against the larger global equity market portfolio) at 0.524 a What is Nestle's cost of equity based on the domestic portfolio for a Swiss investor? b. What is Nestle's cost of equity based on a global portfolio for a Swiss Investor? a. What is Nestle's cost of equity based on the domestic portfolio for a Swiss investor? % (Round to two decimal places.) b. What is Nestle's cost of equity based on a global portfolio for a Swiss Investor? (Round to two decimal places) Genedak-Hogan Cost of Equity. Use the table in the popup window to answer the problem. Genedak-Hogan (G-H) is an American conglomerate that is actively debating the impacts of international diversification of its operations on its capital structure and cost of capital. The firm is planning on reducing consolidated debt after diversification. Senior management at Genedak-Hogan is actively debating the implications of diversification on its cost of equity. All agree that the company's returns will be less correlated with the reference market return in the future, the financial advisors believe that the market will assess an additional 3.1% risk premium for "going international to the basic CAPM cost of equity. Calculate Genedak-Hogar's cost of equity before and after international diversification of its operations, with and without the hypothetical additional risk premium and comment on the discussion What is Genedak-Hogan's cost of equity before international diversification of its operations without the hypothetical additional risk premium? 0% (Round to two decimal places.) What is Genedak-Hogan's cost of equity before international diversification of its operations with the hypothetical additional risk premium? % (Round to two decimal places.) What is Genedak-Hogan's cost of equity after international diversification of its operations without the hypothetical additional risk premium? O % (Round to two decimal places.) What is Genedak-Hogan's cost of equity after international diversification of its operations with the hypothetical additional risk premium? % (Round to two decimal places) nefit). This then creates X of internationally Data table (Click on the icon to import the table into a spreadsheet) Symbol Assumptions Correlation between G H and the market Standard deviation of G-H's returns Standard deviation of market's returns Risk free rate of interest Additional equity risk premium for internationalization Estimate of G-H's cost of debt in US market Market risk premium Corporate tax rate Proportion of debt Proportion of equity Before Diversification 0.93 29.9% 18.5% 3.2% 00% 73% 5.4% 38% 34% 68% After Diversification 0.74 24.7% 18.5% 3.2% 3.1% 6.9% 5.4% 38% 2016 214 RPM 1 DIV EMV