What is Ferrari’s cost of debt, after-tax, in euros? What is Ferrari’s cost of equity in euros? What is Ferrari’s market capitalization? What is Ferrari’s total value of equity outstanding? What proportion of Ferrari’s capital structure is equity? What proportion of Ferrari’s capital structure is debt? What is Ferrari’s weighted average cost of capital? What is Ferrari’s WACC if its beta was higher, like other automotive companies, say 1.20?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Ferrari’s IPO and WACC. Ferrari, the famous high performance automotive group, launched its initial public offering (IPO) on October 20, 2015. Although the share price had initially risen to over 57 per share, by the end of the year it had settled to 48. Ferrari had been owned by Fiat (Italy) and had never calculated its own cost of capital before, once independent of Fiat. It now needed to, and one of its first challenges was estimating its beta. With only two months of trading to base it on, the corporate treasury group had started with what were considered “comparable firms,” which, for Ferrari, meant firms in the luxury goods industry, not automotive. Luxury goods were historically less volatile than the market, so the initial guess on Ferrari’s beta was 0.90. Using the following assumptions, answer the questions.
- What is Ferrari’s cost of debt, after-tax, in euros?
- What is Ferrari’s
cost of equity in euros? - What is Ferrari’s market capitalization?
- What is Ferrari’s total value of equity outstanding?
- What proportion of Ferrari’s capital structure is equity?
- What proportion of Ferrari’s capital structure is debt?
- What is Ferrari’s weighted average cost of capital?
- What is Ferrari’s WACC if its beta was higher, like other automotive companies, say 1.20?
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