Chengdu Motors is a new entrant in the auto industry in China. It specializes in small, customized
Question:
Chengdu Motors is a new entrant in the auto industry in China. It specializes in small, customized cars, designed for middle-class Chinese customers. Assume that the risk-free rate is 6.25%, and the market risk premium is 7.2%. As an analyst, you are working with the following data on a set of comparable firms. Chengdu Motors has a target Debt to Equity capitalization of 0.60. The beta of debt for Chengdu Motors is assumed to be negligible. The beta of debt for comparable firms is also assumed to be negligible. The tax rate can be taken as 33%.
Company Name | Levered Equity Betas | Debt/Equity Capitalization |
Faw Car Co. Ltd. | 1.5 | 1 |
Dong Feng Automobile | 1.3 | 0.70 |
Ah Jianghuai Auto Co. | 1.2 | 0.22 |
Chang Auto Co. | 2.1 | 2 |
What is the estimated cost of equity for Chengdu Motors? (nearest till two decimal places expressed as a %)
Select one:
a. 14%
b. 11.53%
c. 7.49%
d. None of the above
e. 15.65%
Fundamentals of Investments
ISBN: 978-0132926171
3rd edition
Authors: Gordon J. Alexander, William F. Sharpe, Jeffery V. Bailey