Hoffman Healthcare, a pharmaceutical firm, is considering investing in a new business - cosmetics. Hoffman has 350 million shares outstanding trading at $ 30 per share; its stock has a beta of 1.20. The firm has $ 2 billion in interest bearing debt outstanding (in market and book value terms), and has operating lease commitments of $ 600 million each year for the next 6 years. The long term treasury bond rate is 6.5% and the market risk premium is 7%. The unlevered beta for other cosmetics firms is 1.15. If the pre-tax cost of borrowing for Hoofman is 8%, estimate the cost of capital. The marginal tax rate is 40%.

Answer rating: 100% (QA)

To estimate Hoffman Healthcares cost of capital we need to calculate the weighted average cost of ca... View the full answer