13.3 Ganado’s Cost of Capital. Maria Gonzalez now estimates Ganado’s 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 is estimated at 0.85, and the company’s capital structure is now 30% debt. All other
13.3 Ganado’s Cost of Capital. Maria Gonzalez now estimates Ganado’s 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 is estimated at 0.85, and the company’s capital structure is now 30% debt. All other values remain the same as those presented in this chapter in the section “Sample Calculation: Ganado’s Cost of Capital.” For both the domestic CAPM and ICAPM, calculate the following:
Sample Calculation: Ganado’s Cost of Capital
Maria Gonzalez, Ganado’s chief financial officer, wants to calculate the company’s weighted average cost of capital in both forms, the traditional CAPM and also ICAPM.
Maria assumes the risk-free rate of interest as 4%, using the U.S. government 10-year Treasury bond rate. The expected
Ganado’s cost of debt , the before-tax cost of debt estimated by observing the current yield on Ganado’s outstanding bonds combined with bank debt, is 8%. Using 35% as the corporate income tax rate for the United States, Ganado’s after-tax cost of debt is then 5.20%
Ganado’s long-term capital structure is 60% equity (E/V) and 40% debt (D/V), where V is Ganado’s total market value. Ganado’s weighted average cost of capital is then 8.08%
- Ganado’s cost of equity
- Ganado’s cost of debt
- Ganado’s weighted average cost of capital
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