Question

​Ganado's Cost of Capital. Maria​ Gonzalez, Ganado's Chief Financial​ Officer, estimates the​ risk-free rate to be 3.70 %​, the​ company's credit risk premium is 4.10​%, the domestic beta is estimated at 1.13​, the international beta is estimated at 0.96​, and the​ company's capital structure is now 65​% debt. The expected rate of return on the market portfolio held by a​ well-diversified domestic investor is 9.10​% and the expected return on a larger globally integrated equity market portfolio is 8.20 %. The​ before-tax cost of debt estimated by observing the current yield on​ Ganado's outstanding bonds combined with bank debt is 8.10​% and the​ company's effective tax rate is 35​%. For both the domestic CAPM and​ ICAPM, calculate the​ following: a.​ Ganado's cost of equity b.​ Ganado's after-tax cost of debt

Answer 1

Answer:

a. Ganado's cost of equity for the domestic CAPM is 9.802% and​ ICAPM is 8.02%

b. Ganado's after-tax cost of debt for the domestic CAPM is 5.265% and​ ICAPM is 5.265%

Explanation:

a. In order to calculate for both, the domestic CAPM and​ ICAPM Ganado's cost of equity we would have to make the following calculation:

for the domestic CAPM

cost of equity=risk free+domestic beat(domestic market rate-risk free rate)

cost of equity=3.70%+1.13(9.10%-3.70%)

cost of equity=3.70%+6.102%

cost of equity=9.802%

for ICAPM

cost of equity=risk free+international beat(international market rate-risk free rate)

cost of equity=3.70%+0.96(8.20%-3.70%)

cost of equity=3.70%+4.32%

cost of equity=8.02%

b. In order to calculate for both, the domestic CAPM and​ ICAPM Ganado's after-tax cost of debt we would have to make the following calculation:

for the domestic CAPM

after-tax cost of debt=8.10%(1-35%)

after-tax cost of debt=5.265%

for ICAPM

after-tax cost of debt=8.10%(1-35%)

after-tax cost of debt=5.265%