| | Problem 13.1 Ganado's Cost of Capital |
| | Market conditions have changed. Maria Gonzalez now estimates the risk-free rate to be 3.60%, the company's credit risk premium is 4.40%, the domestic beta is estimated at 1.05, the international beta at .85, and the company's capital structure is now 30% debt. All other values remain the same. For both the domestic CAPM and ICAPM, calculate: |
| | a. Ganado's cost of equity |
| | b. Ganado's cost of debt |
| | c. Ganado's weighted average cost of capital |
| | | | Domestic | | International |
| | Assumptions | | CAPM | | ICAPM |
| | Ganado's beta, β | | 1.05 | | 0.85 |
| | Risk-free rate of interest, krf | | 3.60% | | 3.60% |
| | Company credit risk premium | | 4.40% | | 4.40% |
| | Cost of debt, before tax, kd | | 8.00% | | 8.00% |
| | Corporate income tax rate, t | | 35% | | 35% |
| | General return on market portfolio, km | | 9.00% | | 8.00% |
| | Optimal capital structure: |
| | Proportion of debt, D/V | | 30% | | 30% |
| | Proportion of equity, E/V | | 70% | | 70% |
| | a) Ganado's cost of equity |
| | ke = krf + ( km - krf ) β |
| | b) Ganado's cost of debt, after tax |
| | kd x ( 1 - t ) |
| | c) Ganado's weighted average cost of capital |
| | WACC = [ ke x E/V ] + [ ( kd x ( 1 - t ) ) x D/V ] |