Gangnam Corp is a South Korea-based music entertainment company, but is interested in launching a new line of clothes and sunglasses under the brand name PSY in hopes of becoming an international phenomenon. They have surveyed the clothing industry and have identified Style Inc. as the closest pure - play firm for the proposed PSY division. Gangnam Corp has a beta of 1.45 and is 64% equity-financed. Style Inc. has an equity beta of 2.24 and a debt-equity ratio of 0.14. The risk-free rate of return is 1.8 percent and the market risk premium is 6.1 percent. What cost of equity should Gangnam Corp use for its PSY apparel division? Assume taxes are 39% and that Gangnam Corp will maintain its current capital structure for its new apparel division.
Gangnam Corp is a South Korea-based music entertainment company, but is interested in launching a new line of clothes and sunglasses under the brand name PSY in hopes of becoming an international phenomenon. They have surveyed the clothing industry and have identified Style Inc. as the closest pure - play firm for the proposed PSY division. Gangnam Corp has a beta of 1.45 and is 64% equity-financed. Style Inc. has an equity beta of 2.24 and a debt-equity ratio of 0.14. The risk-free rate of return is 1.8 percent and the market risk premium is 6.1 percent. What cost of equity should Gangnam Corp use for its PSY apparel division? Assume taxes are 39% and that Gangnam Corp will maintain its current capital structure for its new apparel division.
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
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Transcribed Image Text:Gangnam Corp is a South Korea -based music entertainment company, but is interested in launching a new line of clothes and
sunglasses under the brand name PSY in hopes of becoming an international phenomenon. They have surveyed the clothing industry
and have identified Style Inc. as the closest pure - play firm for the proposed PSY division. Gangnam Corp has a beta of 1.45 and is
64% equity-financed. Style Inc. has an equity beta of 2.24 and a debt-equity ratio of 0.14. The risk-free rate of return is 1.8
percent and the market risk premium is 6.1 percent. What cost of equity should Gangnam Corp use for its PSY apparel division?
Assume taxes are 39% and that Gangnam Corp will maintain its current capital structure for its new apparel division.
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