Question

Maria​ Gonzalez, Ganado's Chief Financial​ Officer, estimates the​ risk-free rate to be 3.00%​, the​ company's credit risk premium is 3.90​%, the domestic beta is estimated at 0.97​, the international beta is estimated at 0.62​, 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 8.40​% and the​ company's effective tax rate is 42%.

Calculate both the CAPM and ICAPM weighted average costs of capital for the following equity risk premium estimates. debt.

a. 8.50​%

b. 7.60​%

c. 5.80​%

d. 4.80​%

Answer 1

	CAPM	ICAPM
A: Risk premium = 8.5%	0.0850	0.0850
Cost of Equity	11.245%	8.270%
Rf+Beta*Rp
Cost of debt
kd*(1-Tax)	4.872%	4.872%
WACC	8.3771500%	6.7409000%

	CAPM	ICAPM
B: Risk premium = 7.6%	0.0760	0.0760
Cost of Equity	10.372%	7.712%
Rf+Beta*Rp
WACC	7.89700%	6.43400%
C: Risk premium = 7.6%	0.0580	0.0580
Cost of Equity	8.626%	6.596%
Rf+Beta*Rp
WACC	6.93670%	5.82020%
D: Risk premium = 7.6%	0.0480	0.0480
Cost of Equity	7.656%	5.976%
Rf+Beta*Rp
WACC	6.40320%	5.47920%

Workings

Assumptions	CAPM	ICAPM
BETA	0.97	0.62
Rf	3.00%	3%
Credit risk premium	3.90%	3.90%
Cost of debt, before tax, kd	8.40%	8.40%
Tax	42%	42%
Proportion of debt, D/V	45%	45%
Proportion of equity, E/V	55%	55%