1. You are analyzing Tiffany & Company, an upscale retailer, and find that the regression estimate of the firm's beta is 0.75; the standard error for the beta estimate is 0.05. You also note that the average unlevered beta of comparable specialty retailing firms is 1.15. Tiffany is rated BBB and that the default spread for BBB rated firms is 100bp over the Treasury bond rate. Tiffany has a debt/equity ratio of 20%. The marginal tax rate for Tiffany is 40%. Historical average Treasury bond rate is 6.5% and the US market risk premium is 5.5%. Estimate the cost of equity, cost of debt, and the cost of capital for Tiffany.

1. You are analyzing Tiffany & Company, an upscale retailer, and find that the regression estimate of the firm's beta is 0.75; the standard error for the beta estimate is 0.05. You also note that the average unlevered beta of comparable specialty retailing firms is 1.15. Tiffany is rated BBB and that the default spread for BBB rated firms is 100bp over the Treasury bond rate. Tiffany has a debt/equity ratio of 20%. The marginal tax rate for Tiffany is 40%. Historical average Treasury bond rate is 6.5% and the US market risk premium is 5.5%. Estimate the cost of equity, cost of debt, and the cost of capital for Tiffany.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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