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Homework answers / question archive / Market conditions have changed
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 CAPM International Assumptions 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%
For domestic CAPM ;
Cost of equity = 9.27%
Cost of debt after tax = 5.20%
Weighted average cost of capital (WACC) = 8.05%
For ICAPM ;
Cost of equity = 7.34%
Cost of debt after tax = 5.20%
Weighted average cost of capital (WACC) = 6.70%
