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
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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.
Transcribed Image Text: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.
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