Question

?Ganado's Cost of Capital. Maria? Gonzalez, Ganado's Chief Financial? Officer, estimates the? risk-free rate to be

3.203.20?%,

the? company's credit risk premium is

4.304.30?%,

the domestic beta is estimated at

1.031.03?,

the international beta is estimated at

0.690.69?,

and the? company's capital structure is now

4040?%

debt. The expected rate of return on the market portfolio held by a? well-diversified domestic

investor is

8.808.80?%

and the expected return on a larger globally integrated equity market portfolio is

7.707.70?%.

The? before-tax cost of debt estimated by observing the current yield on? Ganado's outstanding bonds combined with bank debt is

7.807.80?%

and the? company's effective tax rate is

3939?%.

For both the domestic CAPM and? ICAPM, calculate the? following:

a.? Ganado's cost of equity

b.? Ganado's after-tax cost of debt

c.? Ganado's weighted average cost of capital

Answer 1

Assumptions	Domestic	International
	CAPM	ICAPM
beta, ?	1.03	0.69
Risk Free Rate K rf	3.20%	3.20%
Company's Credit Risk Premium	4.30%	4.30%
Cost of Debt Kd	7.81%	7.81%
Corporate income tax rate, t	39%	39%
General return on market portfolio, km	8.81%	7.71%
Optimal capital structure
Proportion of debt, D/V	40%	40%
Proportion of equity, E/V	60%	60%
a) Ganados cost of equity ke = krf + ( km - krf ) ?	8.982%	6.310%
b) Ganado's cost of debt, after tax      kd x ( 1 - t )	4.762%	4.762%
c) Ganado's weighted average cost of capital     WACC = [ ke x E/V ] + [ ( kd x ( 1 - t ) ) x D/V ]	7.294%	5.6908%

                                                                                                                                                                               

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