Question
You are considering opening a luxury apparel store. You have identified luxury designer firm Pucci as a firm closest to your line of business. Assume
You are considering opening a luxury apparel store. You have identified luxury designer firm Pucci as a firm closest to your line of business. Assume that Pucci has an equity beta of 2.0, the risk-free rate is 2% and market risk premium is 7%. Assume that Pucci has $100 million in equity and $150 million in BB rated debt that has a 20% percent chance of default. When Pucci defaults on its debt, the loss rate is expected to be 60%. The yield on Puccis BB rated debt is 16%. Suppose Pucci has $20 million in cash on its balance sheet as well.
A. Given this informtion, what is your estimate for Pucci's equity cost of capital?
B. Given this information, what is your estimate for Pucci's debt cost of capital?
C. Given this information, what should be your estimate for cost of capital for your new apparel store?
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