Question
You are opening a pet shop in NYC. To estimate its cost of capital, you identify PetSmart as the comparable firm. PetSmart has a market
You are opening a pet shop in NYC. To estimate its cost of capital, you identify PetSmart as the comparable firm. PetSmart has a market cap of $3 billion, debt of $2 billion, and cash of $1 billion. Beta on its debt is 0.1 and beta on its equity is 1. The expected market return is 10%, the risk-free rate is 1%, and corporate tax rate is 25%. a. What is the cost of debt for PetSmart? b. What is the cost of equity for PetSmart? c. What is the unlevered cost of capital for PetSmart? d. What is the WACC of PetSmart? e. You plan to finance your pet shop only with equity. What is the cost of equity on your pet shop? f. You plan to finance your pet shop with 75% equity and 25% debt. What is the cost of capital on your pet shop
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