Question
Suppose stock in Babolat Corporation has a beta of 0.80. The market risk premium is 6%, and the risk-free rate is 6%. Babolats last dividend
Suppose stock in Babolat Corporation has a beta of 0.80. The market risk premium is 6%, and the risk-free rate is 6%. Babolats last dividend was 1.20 per share, and the dividend is expected to grow at 8% indefinitely. The stock currently sells for 45 per share. Samsung has a target debt-equity ratio of 0.50. Its cost of debt is 9%. Please ignore taxes for the purpose of this exercise. Instructions: a. What is Babolats cost of equity capital? Assume that you equally believe in the CAPM approach and the dividend growth model. (5 points) b. What is Warrens WACC? (5 points) c. Babolat is seeking 30 million for a new project. The necessary funds will have to be raised externally. Babolats flotation costs for selling debt and equity are 2% and 16%, respectively. If flotation costs are considered, what is the true cost of the new project? (10 points) d. Under what circumstances would it is appropriate for Babolat Corporation to use different costs of capital for its different operating divisions? What are two techniques you could use to develop a rough estimate for each divisions cost of capital? (10 points)
Please elaborate on your work and solutions
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